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Carl Gerhardt

Business Sense & Sensibility

By Carl Gerhardt

About Carl

Carl Gerhardt is the chairman of Alliance Franchise Brands LLC, the parent company of Allegra Network LLC and Sign & Graphics Operations LCC, and a world leader in marketing, visual and graphics communications, linking more than 600 locations in the United States, Canada and United Kingdom. The company’s Marketing & Print Division, headquartered in Plymouth, MI, is comprised of Allegra, American Speedy Printing, Insty-Prints, Speedy Printing and Zippy Print brands of marketing, printing, mailing and Web services providers. Its Sign & Graphics Division, headquartered in Columbia, MD, is comprised of Image360, Signs By Tomorrow and Signs Now brands of sign and graphics communications providers.

Carl and his wife, Judy, owned and operated their own successful Allegra franchise for nearly 20 years before selling the $2.3 million operation in 2003. He is a PrintImage International/NAQP Honorary Lifetime Member and was inducted into NAPL’s prestigious Soderstrom Society in 2010 in recognition of his contribution to the industry.

 

How Much Debt Is Enough? Too Much?

 
How much debt is too much? Should you ever be debt free? What are some good guidelines for how much a business should be leveraged?

Over the years and after working with many different print shops, I have come up with what I believe are some good guidelines.

First, let me point out that I am expressing these guidelines or ratios as a percentage of sales. Further, I am defining these costs as debt/loan payments the business must service. This would include any loan payments to lending institutions and/or any lease payments. This does not reflect any depreciation since it is not a cash expense.

Because of the tax rules dealing with depreciation, including it as “debt service” or “capital costs” can be misleading. Instead, I choose to view this from the perspective of cash flow capital cost.

Here are my guidelines:
  • Less than 5 percent—You are likely milking the cash cow and probably not investing enough to keep the business healthy. Do this too long and you become a dinosaur.
  • 5-10 percent—You are about right to maintain a healthy business and still have good cash flow.
  • More than 10 percent—You’re either in a heavy “invest for the future” mode or you may be over-leveraged and headed for trouble.

Being in any of these three categories can be part of a good plan if it is done strategically and purposefully.

If you want to build cash and not worry about the long-term, it might be acceptable to “milk the cash cow” with little or no debt service. Of course, this also means you may end up with a business that has little value when you get ready to sell. Contrary to some opinions, pushing up the bottom line before you sell might backfire if the business is not well-positioned for the future.

If you make a big equipment or software purchase (or even acquire another shop) and need time to ramp up sales, having debt spike to more than 10 percent could be a good strategy as long as the sales come. But, if capital costs continue at this level indefinitely, the business may not be as profitable as one would like.

If the business has a rapidly growing sales trend for several years and it requires continued investment in technology or people to make it happen, there might be an exception...the old “make it up in volume” strategy.

It would take a book to adequately deal with this topic, but in conclusion, I have found that businesses that stay in that 5-10 percent debt range, over time, do a pretty good job of keeping the business healthy and produce good profitability and cash flow at the same time. Short-term high or low spikes also work. Of course, there are ways to manage those levels by refinancing debt or paying down loans when cash allows. This needs to be viewed with a lot of commonsense.

I also want to point out that my experience is coming from operations in the $1-5 million sales range in the small commercial printing market. I am not so sure that these same guidelines would hold true for larger commercial operations, but I suspect they would.
 

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