Tales from the Buy-Side – Real Insights

Went to visit what I would call a conglomeration of businesses – all of which have been operating for over 40 years.  Well, having gone down the road of buying business for the better and worse, much comes into sharp relief. 

First off the total of three company’s combined revenue was approximately $1MM in 2008.  As for profitability – it’s hard to say because the financial statements I received included the revenue from real estate holdings.  However the manufacturing companies had a gross profit of 30% and the total entity including the real estate was not profitable – even with the real estate contributing $600,000 of income (for a total of $1.6MM).

The fact is that every aspect of the business seemed run down and outmoded.  The two facilities including equipment seemed as though no improvements had been made in 20 years. The marketing brochures were black and white photocopies that were stapled together.  The inventory was haphazard.  The website was sparse and uninformative.  There was no sales force or distribution capability.  There was no engineering group to upgrade the products.  Financial sophistication was not apparent.  I wondered how a losing operation supported a General Manager’s Mercedes.    

What’s my take?  No matter what the valuation it almost felt as though it would require too much time and money to bring these companies into the 21st century.  One would need to invest in equipment, people, and the various disciplines such as marketing, sales, engineering and so on.  Furthermore, it was not clear to me whether the companies needed to be moved from existing facilities.  The move along could cost $400,000 (the equipment was heavy and large).  I did not even broach the subject of the competitive landscape and the overall viability of the businesses. 

It almost felt as though the seller should pay the buyer to take the business off his hands.  It felt as though the basic foundation was not sufficient to support a renewed effort at expanding the businesses.  The seller, while nice enough, would seem to have a valuation expectation that would make this deal impossible to conclude.

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