When Valuations Go Wrong – A Case Study

When Valuations Go Wrong – A Case Study

Originally Published in Sellingyourbusiness.com

“Know Before You Go”

That old travel adage, “know before you go,” also applies to your company. Know as much about your financial position before selling your company, looking for investments, applying for a bank loan, merging, or shutting it down.

Whichever side of the fence you are on, buyer or seller, you need to know the valuation of that company, including:

  • The balance sheet including money owed, revenue expected, product and labor costs.
  • The marketplace including competitors, start-ups, government regulations, market changes.

Makes sense, doesn’t it? Just like buying a new computer, a new house, or a new frying pan, do your research to make a decision on the value, and what will work, and what won’t.

“The Profit”  – Marcus Lemonis

Who is Marcus Lemonis and What is “The Profit?”

Marcus Lemonis is chairman and CEO of Camping World and Good Sam Enterprises. He has approximately  6,000 employees in over  US 100 cities. Forbes Magazine estimates his consolidated companies  “will record close to $2.5 billion in sales in 2013.”[1]  An investor and turnaround guru, he works with small business to make them successful.

“The Profit” is a US television program aired on the CNBC network. It  follows Lemonis as he decides whether to invest in a small business, and the role he plays to make it profitable.  Lemonis, through “The Profit,” has invested in a wine store, a homemade candy store, a unique gym, among others. Lemonis turned around Car Cash in New York City and made it a national business.

How does Lemonis pick a business to work with? According to his Forbes interview, he first has to be “enticed by the product or the industry….Then I look for passion. If a company has these two qualifiers, I go for it.”

Such was the case with A. Stein Meat[2] of Brooklyn, New York.[3]

Stein Meats – Know Thy Balance Sheet

Stein Meat is a meat supplier and  New York icon. Founded 75 years ago by two partners, the Company was inherited by their sons, Alan Buxbaum and Howard Mora, who also run the Company as partners. Many employees have been there for 20 years or more.

In  the last 40 years  that Buxbaum and Mora have run the Company, it’s become a $50 million business. In addition to supplying quality meat to the trade, Stein Meat developed the Brooklyn Burger, a prime hamburger which is the official burger of the New York sports teams the Yankees, Mets, and Nets. It costs Stein Meat  $400,000 a year for this placement at the three stadiums.

For Buxbaum and Mora, Marcus Lemonis was their “white knight.”

Buxbaum and Mora asked Lemonis for a  $5 million for one-third of Stein Meat.  Their valuation wasn’t based on “math,” by their own admission. Valuations should always be done carefully, and the numbers should always be known. This was among their many mistakes.

Lemonis countered with a $1 million for a fifty percent share of the Company which was accepted. What actually transpired off-camera in terms of the deal-making isn’t known, and neither is the share of the business, but in the end, the deal was made and Lemonis was in charge.

Accounts Receivables Will Sink Stein Meat

Stein Meat is owed more than $4 Million by its customers, of which half is more than two years old, and most likely not collectable. In addition, Stein owes $2 Million, and has a $4 Million bank loan, on which the bank is demanding payment.

Lemonis came to learn that Stein owes more money than it has, and that the business is almost insolvent. “The process is broken,” Lemonis concluded, in this “competitive business, which is a commodity, with thin margins.”

The owners were not aware of how much money they have, and how much they owe. “This is new to us also,” they told Lemonis. “We should have been watching it more carefully.” Company owners who don’t know their balance sheet are not really running a business, no matter how good the product is.

With labor issues, staff loyalty accepted in place of competency, Lemonis  changed the process to get the right people into the right jobs, tightened up spending, and tried to collect the accounts receivables, as well as now getting paid upon delivery. No more accounts outstanding.

But as the broken processes and  balance sheet of Stein Meat revealed itself, it was clear Lemonis had to make a different deal.  He told Buxbaum and Mora he didn’t think this was a good investment for him, but he made a commitment, and knows he can’t back out completely at this point.

Lemonis reduced his stake in Stein Meat to one product, The Brooklyn Burger, with a plan to  market to grocery stores and end the expensive sports endorsements,  and reduced the amount of his initial investment. This would help with the $200,000  Stein needed to make payroll. Lemonis doesn’t “give out money,” but he saw Brooklyn Burger as a way to get a new product into the marketplace,  and make it work to pay down the debt.

Lessons Learned

The Owners of Stein Meat expected a white knight, regardless of their situation. But the financial management of the Company goes past problems of casual book-keeping to a near abandonment of fiduciary responsibilities.

The partners not only had no idea of the valuation of their company in order to present their case to the white knight, they paid little attention to any of the financial details, including debt, uncollected funds, margins, machinery, real estate, competition, and labor contract issues.

The Stein Meat owners admit they didn’t “do math” – they came up with a loan and share amount for their white knight based on a lose (and incorrect) understanding of what they owed and what they needed to stay in business. That’s not a valuation in any traditional sense.

That Lemonis didn’t take the deal is not surprising.  Although he continues to be involved, the future of Stein Meat looks grim.

How to Avoid this Mess

As a business owner, you have a responsibility to know as much about the financial end of the business as you do about how the product tastes. And, if you need to call in a white knight, or want to sell outright,  you will have had to do all of your valuation work up front to get the right deal. Stein Meat is an example of how everything went wrong. Great product, bad business management. It’s doubtful the partners will be able to pass the business on to the next generation.

[1] For background information on Marcus Lemonis, see the Forbes Magazine bio and interview: http://www.forbes.com/sites/danschawbel/2014/03/11/marcus-lemonis-his-entrepreneur-journey-and-investing-habits/

[2] Hereafter referred to as “Stein Meat”

[3] The CNBC (US) television network aired the Stein Meat episode of “The Profit” on March 4, 2014, season two of the program.  http://www.cnbc.com/live-tv/the-profit/full-episode/a-stein-meat-products/180937283882