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Business Evaluation and Valuation (Part 1 of 2)

Howard Scott |

For those who have never met Richard Ehrenreich, let me introduce you: Ehrenreich is president of Olney, Md.-based Ehrenreich & Associates, and an industry guru. He has spent most of his life in the drycleaning business. For the last 40 years, he has assessed, valued and sold drycleaning plants, and now is a pre-eminent broker and evaluator of business worth in the industry.
He has been involved in hundreds of sales, valuations, succession plans, consultations and acquisitions. Although much of his business is in Maryland, Virginia, West Virginia, and Washington, D.C., he has worked with major chains from as far away as Japan and Hawaii. Along the way, he has served as an expert witness and a consultant in divorce, partnership and estate situations, as well as a forensic evaluator in complex legal issues involving the ownership interests of drycleaning businesses.
Ehrenreich started out in the industry sweeping floors at his father’s drycleaning-and-laundry-machinery distributorship, and accompanied “Uncle Milty” Ehrenreich throughout the mid-Atlantic region on sales calls during the summer. In 1969, he joined his uncle, Bill Cockley, at his distributorship, which eventually developed and brokered more than 100 drycleaning plants and coin laundries. He later became a principal at the organization.
For 25 years, Ehrenreich owned and operated Mac Dee Quality Cleaners & Shoe Repair Shops, a successful Maryland chain that served as the exclusive drycleaner and cobbler to the White House. Now, Ehrenreich is executive director of the MidAtlantic Association of Cleaners (MAC) and a former vice president of the International Fabricare Institute (IFI).
Here’s how he evaluates drycleaning operations and places value on them. He begins by identifying the business’ current status in the marketplace and its potential with an examination of its strengths, weaknesses, opportunities and threats — the proprietary SWOT analysis.
“Owners are too focused on the basics. During the work week, owners are so focused on production goals [and] keeping labor costs down in order to make payroll that they don’t have time to look at the big picture — where their business is heading. I try to teach them how to think objectively about their businesses.
“My task is to help the owner fully understand not only the physical characteristics and financial condition of the business, but also its relationship to the economic environment, its competitive and strategic strengths and weaknesses, and its potential appeal in the marketplace and to prospective buyers.
“As part of our assignment, we prepare a written report showing the strengths, weaknesses, opportunities and threats of the business, together with a list of items that will help improve the business and increase its value. Normally, the owner’s compliance to this list will provide both additional income and reduced expenses that will return many times the cost of our consulting assignment. We take a very complex issue and remove the subjectivity from of the equation. It’s never easy, but it is necessary if the business is to have a successful sale or succession, or even a brighter future.”
Ehrenreich begins by recasting the financials. “The first thing we do is review the business’ financial records and recast the in-house, or preferably the CPA’s, financial statements or tax returns. Next, we work with the owner in a team effort to review all relevant materials, including building leases, promotional programs, price structure, competition and sales trends, and the labor and equipment elements of the business.
“Following this analysis, we recommend changes to improve the profitability and value of the business. For example, several years ago, we examined a plant with a 110-pound petroleum machine and three non-reclaiming tumblers that used $12,000 worth of petroleum solvent annually. We advised the owner to install two reclaiming tumblers that recaptured 95% of the solvent and added $10,000 to the bottom line. We also recommended several personnel and management changes to the production department of this five-store chain to further enhance the profitability.
“In another example, we evaluated a company in which two key employees were earning the same amount combined that a relative in an equivalent position was earning alone. We recast the relative’s income down to the others’ level and were able to save $52,000, including $12,000 in costs — workman’s comp, FICA, and state and federal withholding taxes. The money transferred directly to the bottom line.
“Through the recasting process, we are able to improve, as well as show, buyers and bankers the full bottom-line profit results. In this instance, we were able to recast profits in a $2 million operation from $80,000 to $400,000 of owner’s discretionary cashflow (ODCF) in order to make the sale and get financing from a commercial lender.”
“Recently, we worked with a $3 million company that consisted of a plant and six drop stores and had taken a long, gradual decline in value and revenues due to the owner’s burnout. Through our analysis and consulting, we helped turn it around.
“To finalize our financial recast and arrive at the ODCF, we remove all unnecessary costs, deprecation, amortization, one-time and non-recurring expenses, interest, owners’ total compensation, nonbusiness-related expenses, etc., from the business’ financials.Ehrenreich continues the business-evaluation process in Part 2 of this report next week, assigning values to plant assets and weighing them in advance of a possible sale.Ehrenreich entered semiretirement two years ago, and dedicated himself to running MAC, offering limited coaching to MAC member cleaners and select clients. For specialized consulting services, contact Ehrenreich at ehrenassoc@comcast.net or call 301-570-3000.
 

About the author

Howard Scott

H&R Block

Industry Writer, Drycleaning Consultant, and H&R Block Tax Preparer

Howard Scott is a longtime industry writer and drycleaning consultant, and an H&R Block tax preparer specializing in small businesses. He welcomes questions and comments, and can be reached by writing Howard Scott, Dancing Hill, Pembroke, MA 02359.

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