The Mañana Man Gets Serious--DeWese
My writing license requires that I write a serious column once every 10 years. This is it.
Lots of times managers tell me, "Mañana Man, I copied your column last month and gave it to all of our salespeople." Now this is your chance, salespeople. Copy this column and give it to your boss.
The National Association for Printing Leadership (NAPL) sponsored a panel discussion at its annual Top Management Conference in Santa Barbara, CA, this past March. Andrew Paparozzi, NAPL's chief economist, invited me to participate on the panel, but other events prevented my attendance. Andrew sent me the panel questions and I responded with the answers you will read below. The panel topic, "Building Value in Printing Companies," has application not only to owners, but also to managers, salespeople and all company personnel.
1--What are the characteristics of a valuable printing company?
"Valuable" printing companies have a demonstrated record of consistently meeting the needs of their customers. These companies first seek to satisfy customers in the market(s) they serve in order to build relationships rooted in loyalty. Simultaneously, these companies, using human respect, sound motivational practices and outstanding management practices, build employee satisfaction and, hence, employee loyalty.
These companies then, as a result of satisfying the customer and employee constituencies, earn superior profits. All valuation methods eventually emanate from profitability. Valuable printing companies also have histories of consistent profitability and have what is known as "quality of earnings." Quality of earnings implies that a company's earnings are not vulnerable to precipitous reductions, nor are they short term in nature. The more valuable companies have proven, year after year, that they are capable of earning superior profits.
2--What does "building value" mean? And why is building value important?
First, "building value" in a privately held corporation defines the activity of increasing the value of the shareholders' equity investment in the corporation. If that value is to be realized in the sale of the company, it means maximizing the "market value" of the equity in a transaction between a willing seller and a willing buyer operating at arm's length. The analogy for building value in a privately held company is precisely the same as that of an investor who seeks appreciation in his or her investment in a mutual fund or shares of a publicly traded stock.
This concept is important to the owners of privately held companies especially, but not limited to the printing industry. This is because many owners do not see themselves as investors, but rather as "business operators" who merely earn a living from the business.
This attitudinal difference between investor and operator can impair the process of building value. Instead, the ideal circumstance is one where the individual seeks both value appreciation and operational success.
3--How do you build value? What are the secrets/characteristics of the most valuable companies?
A. The most valuable companies are led and managed by individuals who are behaviorally sound—that is to say, they are absent of officiousness, pretentiousness and selfishness, and are selfless human beings. Additionally, they are balanced managers who are accomplished in the entire range of management functions, including finance, accounting, operations, marketing, sales, planning, controlling and, most importantly, motivating people.
They are single-minded people whose principal life focus is the growth and success of their enterprise. This is not to say that they have no other interests. It does mean their business life is not subject to distractions that can range from drinking, gambling and philandering to gardening. The company is their primary life activity. Finally, these managers possess the highest integrity.
B. The most valuable companies have identified niches within specific market segments that they have learned to serve. Serving a niche creates competitive barriers to entry and insulates the company from excessive competition. A general commercial printing company that has learned to serve the promotional needs of the pharmaceutical industry can accomplish this, for example, or has learned to serve the miniature folded insert/outsert needs of the same pharmaceutical companies.
The niches may not require specialized equipment, but they do require specialized knowledge. Niche-focused companies, when well managed, almost always enjoy superior income statement margins when compared to their unfocused brothers and sisters. As an example, niche-oriented companies frequently enjoy gross margins in excess of 30 percent where a generalist company down the street may do well to earn gross margins of 25 percent.
C. Usually, the most valuable companies are "current" with their investment in capital expenditures. They have consistently invested in the most efficient and productive technology.
D. Often, the most valuable companies have lower assets-to-sales ratios. For example, a company with assets of $5 million supporting sales of $15 million will be more valuable than a company with assets of $7.5 million supporting the same sales of $15 million. Obviously, the ratio of 1:3 implies more efficient utilization of the assets, as well as more frequent turns of the current assets. On the other hand, the company that has deferred cap expenditure investments and is temporarily benefiting by getting by with old equipment will also have a good, but misleading, assets-to-sales ratio.
E. Valuable companies always have stable, loyal, active, prospecting oriented, well-trained and productive sales teams. The company leadership has a sales focus, is "in touch" with customers and respects the contributions of the sales team.
F. Valuable companies have an active managerial (versus custodial) finance and accounting function. The CFO is a team member and actively seeks to improve company performance. Valuable companies use their MIS system to its fullest extent and all employees perceive it as a vital tool. Frequently, the most valuable companies produce their monthly operating statements in fewer than five days post closing.
G. There is an active effort to improve receivables and inventory turns.
H. There are partnership relationships with suppliers.
I. There is no account concentration where one or a few accounts amount to a material percentage of total sales. For that matter, there is no salesperson concentration where one at-will salesperson accounts for, say, more than 25 percent of total revenues.
J. Valuable companies typically do things together and celebrate together.
K. Valuable companies are good citizens and give back to their communities.
L. The ownership and management of valuable companies actively shares company information and shares the wealth. There is no "employee paranoia."
M. Valuable companies always have well-organized sample rooms containing an adequate inventory of hand-picked samples.
N. The CEO's office is always smaller than the space allocated for the sales department.
O. The owners' luxury automobiles are never parked just outside the front door.
4--How do you measure value?
There are a variety of methods for measuring value. In the end, the ultimate measure of value is the price a willing buyer will pay for a company in terms of Total Enterprise Value (TEV). The written equation is TEV less funded debt (interest bearing debt) equals equity. On the other hand, some measure value by book value, adjusted book value, return on investment, return on sales, return on assets, return on equity, Economic Value Added, or Earnings Before Interest, Taxes Depreciation and Amortization (EBITDA) and the application of some multiple.
Ultimately, however, value is measured by the amount an owner can extract, through the sale of the company, from his ownership to reinvest elsewhere.
5--How do you protect value and continue to build value in a weakened economy?
Our experience has shown that printing companies that possess the characteristics listed above usually sail through economic downturns with little or no impact on profits or sales growth. This happens because these strong companies are capitalizing on the weakness of their less fortunate competitors. In bad times, the strength of good companies is enhanced and the weakness of substandard companies is exacerbated.
Depending on your perspective, it is unfortunate that the printing industry has too many substandard companies. You might say that during poor economic times, good companies get somewhat better and weak companies get dramatically worse. Of course, if your company is totally dependent on the automakers and the automobile industry goes in the tank, your company clearly will suffer.
6--How do I get started? What's most important for me to remember about value creation?
If you are the owner/CEO, you must begin with yourself and an objective self-analysis. Most of us, as mere mortals, have great difficulty with self-assessment and then using it to change. If management is incapable of embarking on the value creation process, then it must fired and replaced with management that can build value.
7--What adds the most value—being a one-stop shop or being a specialist?
You can be a one-stop shop and be a specialist. It is important to be a specialist in the truest sense of market segmentation.
8--Does an investment in technology always add value to business?
No. You can choose the wrong technology, not use it properly or buy it based on fallacious market information. Capital expenditure decisions should be market based (customer based) and be made using valid capital budgeting analysis. Additionally, for the short term, the debt attendant the cap expenditure usually reduces the value of equity.
9--What can be done to build value if you are in a declining market segment?
This is a broad question that must be defined by the circumstances of a declining market. Two strategies, acknowledging that they may be only short term, are diversification into other segments or the acquisition of weaker competitors in the declining segment.
Or, wait, maybe there's another way to build value? I know! Get out there and sell something!
About the Author
Harris DeWese is the author of Now Get Out There and Sell Something! published by Nonpareil Books. He is a principal at Compass Capital Partners and is an author of the annual "Compass Report," the definitive source of information regarding printing industry merger and acquisition activity. DeWese specializes in investment banking, mergers and acquisitions, sales, marketing, planning and management services to printing companies.