SMALL BUSINESS : BUSINESS MAKE-OVER: Southern California Companies Learning How to Succeed : Bar Supplier Seeks Ingredients for Maximum Value at Sale Time
The happy ending for many small-business owners comes the day they sell their ventures at a profit.
Linda and Al LeBrun are looking forward to that event. As with many successful entrepreneurs, though, they are unsure how to get the maximum value for their company when they bow out.
After 20 years of operating Linda’s Bar Supplies Ltd. of Santa Ana, the wife-and-husband team have decided to sell the profitable company within five years. How they are going to achieve that goal is unclear, they said.
“It’s hard to get focused,” said Linda LeBrun, 52. “Part of the problem we have here is we are both working the business, and we don’t have a lot of time to manage it.”
The business is more complicated today than when the LeBruns started out. In 1979, a mere $15,000 bought them a used delivery van and a customer list consisting of “dingy little bars” where Al was expected to stop in daily to offer individual packages of potato chips or a beer glass or two and to rotate the stock.
The nine-person company now has customers such as the Ritz-Carlton hotel in Laguna Niguel and country clubs and restaurants throughout Orange County. That client base, as well as acquisitions of two small competitors, helped boost sales to $1.85 million last year, a 50% increase since 1995.
The couple say they want to grow their business to “the next level” to get the highest price for it. At the same time, though, they worry about finding someone who can afford to buy the company.
“We’ve got to start planning . . . how to get ready to sell this business,” Al LeBrun, 67, said.
It’s smart to be prepared, said consultant John L. Bates. A savvy buyer is likely to come armed with a shopping list of requirements on which Linda’s Bar Supplies will be evaluated.
Bates, president and managing partner of Spectrum Business Resources Inc. of Lake Forest and Del Mar, evaluated the LeBruns’ wholesale distribution business in a variety of categories, each of them important to the value of the company. The categories can serve as a checklist for any business owner interested in selling a business for maximum profit.
Bates gave Linda’s Bar Supplies a positive rating in five categories: sales trends, longevity, stability and quality of employees and the organization, tangible assets and market strength.
“They have done a good job for a small company,” Bates said.
The consultant, whose firm acts as a merger-and-acquisition intermediary, creates fair-market valuations and offers strategic advice and financing, estimated the company would sell today for 2.37 times its annual cash flow, or about $370,000. That is 18% below the median for all wholesale companies in Spectrum’s database, Bates said.
“It’s a nice little business and they make a nice living out of it, but in terms of trying to maximize value, if they can get some of the negatives out of the way, I think they can get into the top half of the median” range, Bates said.
He suggested the LeBruns set a goal of selling the company at three times its current cash flow, or about $500,000.
The most important step they can take to reach that goal is to increase the company’s profitability, he said. Sales trends have been good--revenue is expected to hit $2 million this year--but gross profit margins have suffered. The company’s gross profit margin--that figure refers to the difference between the price of a product and the cost to produce it--dropped to an average of 16.6% this year from 22.4% five years ago.
That gradual squeeze on profit margins is typical of many small businesses and is something that often sneaks up on business owners, Bates said. As suppliers bump up the price of Linda’s Bar Supplies’ napkins over the years, for example, the company failed to pass on that increase to customers, and gross profit margins suffered. Too many small-business owners don’t want to rock the boat, or they mistakenly believe they can make it up on volume--that is, by increasing sales.
“The truth is that never happens,” Bates said. “You have to maintain those margins and pass on those price increases.”
He suggested four actions the LeBruns could take to improve the company’s gross profit margins. He also compiled several suggestions for attacking weaknesses in the five other categories key to the company’s market value: product mix, competition and exclusivity, industry sector, customer mix and importance of the principals to the business.
To improve the gross profit margin, Bates suggested the LeBruns negotiate better prices with their vendors, raise prices on certain items, be more selective about the products they carry and the customers to whom they sell.
It won’t be easy to get better prices from vendors, Bates acknowledged, in part because the LeBruns rely on one local distributor for roughly 85% of their supplies. It’s a convenient arrangement and saves them time and wasted inventory, but the consultant encouraged them to shop around for the best prices on key heavy-volume items.
Compensatory pricing is another method the owners can use to boost profit margins. One compensates for lower-profit items by adding items with a higher profit margin. For example, the LeBruns may want to be priced competitively on a staple such as napkins, a low-margin item most customers need, or martini glasses. But they could add an exclusive brand of high-priced martini olives to compensate.
He also suggested that the owners prune or replace items that are under-performing in sales, volume or profit margin. Being selective about the items carried can increase the profit margin a business needs to survive, he said.
Bates also warned the LeBruns against keeping customers who are price buyers.
They’re in every industry and are easy to spot, he said. They don’t want to hear about product quality or speedy service. Their concern is rock-bottom prices. Demanding customers who squeeze a company in every deal usually aren’t worth the business in the long run, Bates said. A company is better off spending time and energy on selling more items to customers who will appreciate and pay a reasonable price for quality and service.
These steps would help improve the product mix Linda’s Bar Supplies offers, the consultant said. The point to evaluating every item and the overall mix in a product line is twofold: improve profits and better meet the needs of important customers, Bates said.
As to the customer mix, Linda’s Bar Supplies doesn’t have an exclusive territory, something a potential buyer of the company may regard as a negative. On the other hand, the company has the opportunity to reach out to customers beyond Orange County. He recommended several steps to broaden the customer mix and geographic range of the company.
Linda’s Bar Supplies first should consider setting up a Web site that offers online ordering. The Web site would enable the company to reach new customers outside of its normal service area. It would also be a draw for larger customers such as hotel chains that are increasingly using the Internet to find product sources, he said.
Second, he recommended that the company look for new customers in the fast-food industry and the institutional and industrial markets. They could supply, for example, employee lunchrooms at hospitals and large companies. Broadening their customer mix would help the LeBruns overcome the fact that their hotel and restaurant clients are vulnerable in a recession.
The company’s name is also a negative factor for a potential buyer, according to Bates. He said he’d like to see the LeBruns change the name as part of their plan to reduce the importance of the principals--namely Linda LeBrun--to the company’s success.
“Linda’s Bar Supplies makes the company sound smaller than it is,” Bates said. “At some point you outgrow the benefit of the known name.”
He and the LeBruns kicked around names such as LB Hotel & Restaurant Resource. If the LeBruns decide to make the change, Bates suggested that they continue to print Linda’s Bar Supplies in smaller letters on invoices and stationery below the larger type of the new name, to make it clear to customers it’s the same company. A change now would make the point to customers and potential buyers that the company carries a full range of products.
As for the LeBruns’ fear that there will be no audience when they take their final bow at the company because no one will be able to afford to buy it, Bates had reassuring words for the couple as he urged them to get started on improvements:
“If a business makes money,” he said, “someone will want to own it. And the more money it makes, the more people who will want it.”
* Cyndia Zwahlen can be reached by e-mail at cyndia.zwahlen@latimes.com.
To be considered for a Business Make-Over, send a letter describing your company and its challenges to Business Make-Overs, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. Or send the information by e-mail to kklein6349@aol.com.
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This Week’s Business Make-Over
* Company name: Linda’s Bar Supplies Ltd.
* Headquarters: Santa Ana
* Type of business: Restaurant and bar supplies
* Status: Corporation
* Owners: Linda A. LeBrun and J. Al LeBrun
* Founded: September 1979
* Start-up financing: $15,000 from refinancing a home mortgage loan
* 1998 sales: $1.85 million
* Employees: 5 full-time, 2 part-time
* Customers: Local hotels, restaurants and country clubs
Main Business Problem
How to take the business to the next level of growth
Goal
To increase the value of the business so as to get the maximum for it when it is sold five years from now
Recommendations
* Take steps to increase the gross profit margin.
* Improve the product mix.
* Consider changing the name of the company.
* Create a Web site.
* Broaden the customer base.
Meet the Consultant
John L. Bates is president and managing partner of Lake Forest-based Spectrum Business Resources Inc., a merger and acquisition intermediary and advisory firm. He is a past president of VR Business Brokers Southern California Council and a former vice president of the Business Brokers Assn. of Southern California.
