The How-To Guide for Selling Your Screen Printing Shop

OVER THE YEARS, many of my consulting and coaching assignments have revolved around preparing for the sale of a business. Most companies are not prepared for what lies ahead. Business brokers have shared with me between 90 and 99 percent of businesses below $10 million in revenue are not prepared to sell. Consequently, the sale takes longer and is listed at a lower value.

This article is an introduction to exit preparation. The goal is to give you an overview of factors to consider. In Part Two, I will cover the types of buyers and some of the strategies needed for each type.

There are several reasons a business owner may want to sell. Some are planned; most are not. The last two years have been stressful for businesses. Many Boomer and GenX owners have simply closed their doors and liquidated their equipment.

Their view is the future is too uncertain. The risk is too high this late in life. There is simply not enough time to recover losses before time runs out. The chosen option is to sell as a fire sale and close, rather than risk going deeper in debt or dealing with Round Three, Four … of the pandemic.

We are now facing the hangover of continued labor shortages, supply disruptions, uncertain inflation, the associated availability of credit, and higher interest rates. On top of these uncertainties are the impacts of evolving digital technologies and the consolidation of markets. All of these factors are on owners’ minds as they try and understand what their next steps may be.

Besides being tired, frustrated, burnt out, or at the end of their careers, there could be partnership, medical, divorce, death, or impending lease/ownership issues. All these factors layer on additional emotional baggage that diminish the negotiating position of the seller.

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If the owner decides to sell, the first question is always: What is my business worth? Before we can answer that, there are factors to consider and examine. At the very front end of the process is the realization that the business value to the buyer will usually be much less than what the current owner thinks it is worth. Let’s try and understand how wide this gap can be.

There are many different ways of calculating business value. Ultimately, it comes down to what the seller is willing to accept. One of the most common approaches is a multiple of EBITDA.

This is an accounting calculation as a multiple of Earnings Before Interest, Taxes, Depreciation, and Amortization. For businesses between $1 million and $10 million, this is often three to four times EBITDA. The factors following are all considerations in determining the multiple.

The natural expectation of a higher value is because the seller has almost always invested years of hard work, sweat, emotional ups and downs, investment, cash flow cycles, and business cycles. This is the dark side of being an entrepreneur and is the expected territory. Experienced buyers will be empathetic, but will negotiate accordingly. The shock of the buyer/seller gap is one of the reasons it takes so long to complete many business sales.

The seller will need to adjust their view to that of the potential buyer. Buyers are not emotionally invested like the seller. They have not experienced the ups and downs, hardships, and emotional chaos you have. More importantly, they will place no value on those experiences.

The hard truth is buyers are willing to take on some risk, but they want a return on their investment. It starts with a look at what your net profit is. The only net profit that counts is what is shown on your Tax Return. This is one true basis for valuation. Again, by the time buyers do their due diligence and back out all of the “tax write offs,” the sale is delayed and the value diminished because it is your word against theirs.

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The second key factor is what your free cash flow looks like. Free cash flow and net profit are two completely different things. Sadly, the majority of small businesses are still not monitoring or understanding their cash flow. This is changing with systems like Profit First that dial in owner’s compensation and profit at the front end.

Free cash flow is the amount of cash generated that is not encumbered. What does this mean? Most business owners do not realize the principal on any kind of equipment loan, line of credit (LOC), SBA loan, or building mortgage are repaid out of future profit. They also do not realize when accounts receivable or inventory increase, it is usually financed out of net orofit unless the line of credit increases. If the LOC is increased, all they are doing is delaying the future free cash flow.

The third factor focuses on customer analysis and distribution. The concern here is with the number of customers, the percentage of business with the largest customer, and the average order size per customer. The future buyer will also be looking at the customer churn rate, which is how soon a customer has to be replaced. Are they single transactions or repeat customers? If they are repeat, how long have they been with you?

This is often a surprise to the seller because they honestly have no idea if a single customer is profitable or not. Often the biggest clients are taking up time and resources and contributing minimally to the bottom line.

Next up is the growth pattern or lack thereof. Is growth consistent or has it changed over the years? This is a particularly challenging area because of the impact of COVID over the last two years.

The buyer will also consider the profitability of new business and how long it takes for them to become profitable. In today’s world, where so much business is moving to ecommerce, one of the key metrics is ROAS. This is Return on Ad Spend.

As online advertising gets more and more expensive and competitive, conversion rates fall and ROAS drops. It is entirely possible to have a ROAS of 300 to 400 percent and still have a very negative profit on the customer transactions. This is a frequent example used by marketing or advertising agencies that makes no sense.

Growth is considered from multiple perspectives. The simplest is top-line revenue growth. I hate this because it does not consider the cost to acquire new customers or the impact on Net Profit or the time it takes to onboard and deliver the customer order. A Harvard Business study in 2007 revealed first year average profit per customer at six percent. In year two, it increased to 24 percent of top line with the massive improvement coming from five different areas.

Other growth is net new customers and net profit (bottom-line growth.) The new customer growth is tempered by the churn or retention rate as this aligns directly to advertising, marketing, and sales costs. Existing customer revenue and profit growth are also included in the due diligence.

Factor five is the competitive positioning of the business in your market. How much market share do you have? How many competitors are in the market? How long have they been competitors? How easy is it to enter the market? What is the business competitive advantage and how easy is it to duplicate?

Lastly, there are a whole slew of items within the financial statements that indicate the relative stability, health, and risk of the business. This could be an article all on its own. A quick survey will highlight the relative ability to pay your bills and the potential risk due to financial factors.

By now, your head is probably spinning trying to process all the factors that determine the value of your business. Coming to a course of action is your next step. Break it down and work through each factor one at a time. You will gain great guidance and save a ton of time by retaining an expert in the preparation and sale of specialty graphics businesses.

Once all this has been determined, how long will the sale take? The simple answer is longer than you think. The faster you want the transaction to close, the more you will have to concede on terms and price. Taking into consideration the factors outlined above, expect the usual sale to be a minimum of one year, likely up to two years. It all depends on how well prepared you are to deal with the due diligence.

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