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Rasmussen’s 2nd top tip – get your ducks in a row

Tuesday, 17 April 2012
By Print 21 Online Article
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Ascent Partners principal, Richard Rasmussen covers the numerous methods of getting the best value out of selling a printing business in his second Top 10 Tip installment. Tip two – building equity in equipment in the lead up to a business sale.

What proprietors should be concerned about is building equity in their balance sheets in the approach to sale. Obviously there are numerous ways to do this. Here we focus on building equity in equipment (the sale price of the equipment and what loans are outstanding on the equipment at time of sale).

When a business is sold, values are apportioned to Goodwill and Plant and Equipment. For example, let’s say you sell the business for $1,000,000 plus stock at valuation. When the sale goes through this figure is broken into Goodwill (say $300,000) and Plant and Equipment (say $700,000).

But this is not what you walk away with. Simplistically, what you walk away with is the $1,000,000 LESS payouts (i.e. staff entitlements, equipment loans and outstanding creditors), PLUS what your debtors owe at settlement date, and what you have in the bank.

One of the areas owners can get tripped up with is the differential between actual plant and equipment value ($700,000 in my example) and what is owed on that plant and equipment. Unfortunately in today’s environment, many proprietors find at this stage they have negative equity.

In the lead up to a business sale, proprietors should spend a lot more time developing their equipment / manufacturing strategy, the major considerations of which we provide below:

A. Get a reality check on your existing equipment values

In the lead up to a business sale it’s always a good strategy to keep abreast of equipment values. In recent years most of this has been downward because of:

  • The strong $A. We live in a global economy. We can check equipment values on line with overseas used equipment dealer web sites. Those values have a direct impact on what your machinery is worth.
  • Supply and demand. With print related firms falling over, there is more equipment on the market. On the other side there is less demand for older equipment. The result is falling values, especially with older technology equipment.
  • Hungrier new equipment vendors. Competition for fewer equipment deals forces new machines prices down, which has a negative effect on used equipment values.
  • For offset printing machines (A3/A2), the impact of digital presses has had a negative impact on values– i.e. there is less demand now for offset presses than there was say five years ago.

It is imperative to watch equipment values. Look at what like equipment is selling for at auctions and in the general market. And when you have these values, check the equity you have in the machinery. You may not like what you see initially but establishing accurate equipment values now will enable you to project what equity you may have in a year or two down the track, and make decisions from there.

Sometimes it’s important to get an independent valuation on plant and equipment, because often vendors see their equipment values through rose coloured glasses.

B. Identify prospective purchasers for your business

When planning your exit, you need to identify the likely type of buyer for your business. Once identified you need to ask, “Will they want to buy the complete business, with equipment, or will the just my sales”? The accuracy of your response is vital to maximising your return.

So you need to consider the type of buyer of your business. “Fresh Starts”, buyers wanting to move into business ownership, usually want to buy a complete business. Hence they are likely to want all of the plant, but in most instances want something relatively up to date.

The vast majority of business purchasers, however, will come from existing printers who want to build their sales and sometimes view a business purchase as a means to upgrade / add to their own plant and equipment.

But in tough times, what they are likely to value most is the sales. Equipment for them is easy to purchase / rent, and they are more likely in these times to have underutilised equipment, so yours may be surplus to their requirements.
Identification of the sort of buyer that will purchase your business is hence, a worthy exercise to consider in the lead up to a sale. It will help with which equipment strategy you adopt.

C. Consider different equipment strategies.

In order to maximise your return, an equipment plan needs to be formulated in the lead up to sale. Here are some different strategies that should be considered:

  1. Pay off equipment as soon as possible; don’t upgrade. This is usually a sound strategy if the vendor realises that as each year passes the market value will of the plant will very likely fall, and that at the end of the day they need to take what the market offers, and this may be via private sale or auction.
  2. Upgrade equipment – this will nearly certainly widen the pool of interested parties who want to take on the equipment component. However one needs to consider that the equipment may still not be required even if it is up to date. Ie. Consider a CtP device, if you update now, will the purchaser have their own CtP and not require yours? Do they need another automated five colour press? Consider that you may be forced to dispose of the equipment yourself. You should also consider the brand you buy – buy a less popular machine and you have a smaller market to sell it to!!
  3. Dispose of some equipment in the lead up to sale. This is an often neglected strategy, but worthy of consideration. Say you have an older press, and its operator retires. Maybe when this happens you get rid of the press, don’t rehire, and outsource that work. It may best to take the dollars on offer for the press then, with the realisation that in the long run you will be financially better off. You need to do the sums on this, and perhaps remodel how your business operates. But don’t tie yourself to the fact that you have to have certain equipment.

Of course your accountant should be able to assist you with tax implications of each.

Digital Equipment

Often digital equipment is rented from the equipment vendor themselves – i.e. a Xerox or Ricoh machine. Usually, when a business sale is made, that rental agreement is transferred to the new owner of the business. However, sometimes the purchaser does not require that machine. In such instances the vendor may be left with a contract that still has many months / years to run.

So, clearly updating digital equipment / starting new rental agreements, close to the proposed business sale date, needs to be very carefully considered – you don’t want to be left holding the baby with a large liability around your neck.

Timing and planning is vital

Planning the timing of your equipment purchases / rentals is vital in the lead up the sale of your business. It can have a major impact on your walk away dollars. It needs to also be considered with other issues such as the timing to coincide with the completion of a property lease and how you want to exit (i.e. have a staged exit with the purchaser).

In most instances, the number one priority should be building equity in your business. This is especially important in the lead up to a business sale – different strategies and business models should be considered. Timing and planning is paramount, especially with your equipment strategy.

Richard Rasmussen is the principal of Ascent Partners, a business that, within the Australian / NZ printing industry, offers Business Appraisals, Business Sales and Business Consultancy services. He can be contacted via the web site, or via phone – 1300 887 648 / 0402 021 101.

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