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Payback: Worth 4 to 6 Times the Effort

 

John Kielich, CPA - Managing Director for Kolb+Co. M&A Advisers   email | bio 
LeAnne Foster, CPA - Senior Associate for Kolb+Co. M&A Advisers   email
January 2012

We think it is safe to assume that if given the opportunity to get back four to six times the amount invested, most people would find that very appealing.  This is what business owners thinking of selling have the chance to accomplish by doing some planning and preparation before a sale.  Assuming the business will sell for four to six times EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), every dollar of expense that you can eliminate will produce a very nice return -- a great investment by any standard.

However, finding and making these improvements is neither easy nor fun.  There are two general paths to explore: increasing revenue and finding cost savings.

Increase revenue. Depending on the cost structure of the company, it could take $10 or more of revenue to produce $1 of net income. A growing company is more attractive to buyers and will often be rewarded with a higher valuation.

Find cost savings. To improve the bottom line, costs within every part of the business should be looked at and considered.  Start with these costs. 

• Material costs: Are you getting the best price from your suppliers?  It could be worth your time and effort to check out other suppliers or, at a minimum, ask your current supplier for a better price. If you are a manufacturer, what are you spending on scrap and rework? Can this be reduced?  
• Facilities costs:  Can utility costs be reduced? Think about your heating, cooling and lighting costs.  Turning down the thermostat or using more efficient lighting could result in some significant savings.    
• Labor and overhead costs:  Are your direct labor costs in line with your peers? If they are higher, how do your wages and benefits compare? You should also benchmark your productivity and consider a lean manufacturing system.  
• SG&A (Selling, General & Administrative) costs:  Where and what are you spending?  Do you have the right number of people or even the right people in the right positions?  What are you spending on other items...are there costs that can be eliminated or reduced?  Would it be more cost efficient to outsource certain functions like HR? 

The key is to look at every line item on the income statement, no matter the amount, and think about how you can improve it.  Remember you can get a four or more times return for every dollar of improvement. Given that it might be worth bringing in someone to help with the review. An unbiased look often proves to be enlightening and valuable. Finally, remember that most improvements take time to identify and capture and, accordingly, lend credence as to why planning for a sale of a business is important and potentially very valuable.