Article prepared by C. Clint Bolte, C. Clint Bolte & Associates, Chambersburg, Pennsylvania. For additional information please call 717-263-5768, fax 717-263-8945, or e-mail to clint@clintbolte.com.

In-Plant Business Valuation

When a corporation chooses to shut down its in-plant printing operation and outsource its printing requirements, there is a creative alternative for structuring the arrangement that could mean more value to both buyer and seller and a smoother transition for the affected in-plant employees.

Quite often when such a decision is reached, a series of separate and independent steps are taken.

(1) Future Printing Needs. Specifications are compiled so that the qualified list of printers can bid on a package of print and design requirements. Printers ask for a guarantee of minimum volume in exchange for any volume discounts. Corporations offer no volume guarantees but might release a multi-year trend of volume. If the corporation does not have their administrative services fully costed, then this historical volume trend might be in total impressions.

(2) Length of Contract. Normally a one year contract is offered with numerous outs stipulated. Many corporations are hesitant to offer a multi-year contract because they don't really know the possible vendors since their print requirements have all been produced in-house.

(3) Equipment Disposition. A couple of used equipment dealers are asked to come in to offer proposals for getting the most cash for all equipment. Depending upon the size of the shop, the dealers will offer to include the equipment in their next auction or hold a dedicated auction on site. If they perceive a ready market, they may offer to pay for certain items. But for a small commercial shop with an assortment of common tools, this cash offer is increasingly unusual. The dealers will offer an unwritten appraisal (may charge for a written one) to sell the quality of their auction abilities. Actual values will rarely be guaranteed and if so would be expected to be quite conservative.

(4) Facility Management Contract. This may be the umbrella arrangement if either of two circumstances exist: the key equipment is leased or a dominant in-house client (with political clout) convinces management that on site service is essential. The later argument is sound for some degree of high speed copying and on-going design requirements with a large client. In time the space normally becomes more valuable for other corporate purposes and the qualified vendor proves capable of meeting fast turn around requirements from multi-shift off site plant(s). If the total value of the print procurement contract exceeds $500,000 a year, many printers would offer to assign an on site customer service representative to work with all in-house clients.

(5) Print Procurement Management. Most corporations have wisely had the in-plant print shop manager involved with on-going print procurement in conjunction with the purchasing department. This involvement has included technical consulting during the design phase to assure easily understood and common print specifications, maintain listing of qualified print vendors for virtually any graphic communications project, and monitor the project produced by outside vendor to assure equitable handling of specification changes and resulting extra charges. When the in-plant shop is disbanded, this supervisor would continue to oversee the outsourcing contract as part of the corporate purchasing department.

(6) In-Plant Print Shop Employees. Print vendors rarely want to be forced to hire these employees as their total compensation packages are higher than normally offered by the printing industry. While hourly wages may be fairly in line, corporate fringe benefits are often 50% higher than printers can afford. Most employees are aware of this which is why in-plant employees accrue many years of seniority. On the other hand reducing FTE count is one of the reasons that corporations want to outsource administrative services. Many corporations prefer to allow their in-plant employees to stay in the company to apply for other openings if available or to terminate under policies their human resources department follows.

Each of these steps can be fairly well defined and while coordinated are executed separately. However, in recent few years a different circumstance and opportunity has presented itself to both the corporation and the qualified print vendors. The situation is that the corporate in-plant is well run, utilizing well maintained and relatively current technology, and saving the corporation money. The outsourcing decision is based solely upon the strategic assessment that the corporation should focus all of its management energies on its own distinctive competence. All its administrative services, regardless of how apparently cost effective, should be outsourced to vendors who espouse this as their distinctive competence.

Hence, the outsourcing process becomes one single integrated move to create a strategic alliance with a key vendor. Potentially the greatest value comes from offering a long term procurement contract to a single print vendor to take over and produce all of the corporation's former in house printing and graphics requirements. In exchange for the long term contract, the printer agrees to purchase the equipment and take over the employees for a specified period of time. Value to the seller and the print buyer are increased if the following features are included in the agreement:

1. The production contract includes at least 90% of print and design requirements, yet no minimum quantities are quarantined. In-plant transitions of at least $250,000 are quite attractive to medium-sized general commercial printers.
   
   
2. The longer the contract the more desirable to the printer. Five years might be requested by the printer while three years might be a realistic compromise for the seller.
   
   
3. While this move is normally quite disruptive to the effected employees (in direct proportion to their length of service), the employees would like to be given an opportunity for an acceptable transition time as would the new employer. The new employer does not want to carry less than optimally productive people for any extended period of time, yet they recognize the humanistic desire for an adequate transition and evaluation period.

Guaranteed employment of 3-6 monthes has often been found to be the most frequent offer. Termination or early retirement would follow the prevailing corporate policies and would be effective when the new vendor is prepared to take over the work. Leaving early by any dissatisfied employees would be quite disruptive to the in-house operation.

1. Total value that the corporation realizes for the used printing equipment will be in indirect proportion to the amount of cash they want up front from the winning printer. Each piece of equipment has three values; auction, negotiated, and as part of an on-going business. There is a fourth value that equals or exceeds this third and highest value and that is as an "in kind" discount on their work to be produced. This is how that process would proceed.

A used equipment dealer or independent appraiser would be asked to appraise all equipment for auction, negotiated, and on-going business value. This is often shown as a range of values. Each qualified vendor would then be asked to offer a "cash" bid as an on-going business and an in kind value to be given to the seller as a percent discount off work produced up to a fixed value. An example might be that the corporate net fixed asset value of equipment is known to be $200,000. The auction value is appraised at $230,000 (less 10% auctioneer fee). The negotiated value (+10 to 15%) is $260,000. The on-going business value could be another 10% or $285,000. The in kind discount rate could be 18-22% of gross billings over three years. This could be $300,000. ($500,000/yr. of sales X 3 yrs X 20% = $300,000). The corporation would want a minimum value for the equipment on that agreement and the printer would want a maximum value.

This technique could net the corporation $70,000 more (30%) than the equipment could be sold for at auction ($300-230 = 70). The only disadvantage is that this will be realized over a three year time period.

Printers level of confidence of receiving this negotiated value for any equipment that he feels is redundant is proportional to the condition of the equipment and its relative young age. Hence, the printer sees a margin reduction of $23,333 a year ($70 ÷ 3 years) or 4.7% which is often acceptable in exchange for historically trended volume levels.

The final agreement would state that the funds from any of the corporation's original equipment sold by the printer would be deposited in an account held by the seller until successful completion of the three year contract. This prevents the printer from selling off assets and unsuccessfully meeting the contract obligations.

The winning package would offer the following aggregate value to the corporation:

1. A low (hopefully lowest) overall print services quotation over the next three years to include a labor inflation cap on a non-guaranteed volume of work.
2. A high (hopefully highest) guaranteed value for equipment transferred to the new owner.

This win-win arrangement is both creative and simple.

Article prepared by C. Clint Bolte, C. Clint Bolte & Associates, Chambersburg, Pennsylvania. For additional information please call 717-263-5768, fax 717-263-8945, or e-mail to clint@clintbolte.com.