Business owners do not normally think about the value of their business on a regular basis. Most owners are not looking to sell and are more concerned with the day to day running of the operation.
However, if you were approached with a view to selling, would your business be in the best possible shape to maximise your sale value? Would it meet your long term goals?
In Auditel’s experience across 3000 clients, we have reduced client business overhead costs under management by an average of 21%. This tells us that those overhead costs were too high by on average 21% and this has a direct impact on the value of those business.
In a sale, businesses are typically valued as a multiple of net earnings; the multiple paid by the acquirer will vary across industries and size of business. To demonstrate the issue, we will use an earnings multiple of 5. The simple table below demonstrates the impact on the value of the business of a 10% reduction in business overhead costs. In this case, the value of the business is increased by 12.5% as a result of a 10% reduction in overhead costs.
In the event of a sale of the business, this 12.5% increase in sale proceeds is lost to the business owner. There is every chance that the purchaser will realise this additional value within their business. The solution is continuous management of all overhead costs but for many business owners, the knowledge, resource and time for this level of cost management are what prevent them doing it. They do not realise that their costs are too high, otherwise they would take action. Alternately they know it but it is on the list of things that never get actioned.
This kind of proactive cost management cannot be implemented once an approach has been made by a prospective buyer. The buyer will value the business on current and historic earnings before any cost management can be undertaken. It is therefore important that overhead cost management is a continuous and ongoing process.
It is not just in the event of a sale, there are other times when a higher business value may be important, for instance when the business is borrowing, higher earnings will help support higher potential borrowing capacity. Higher earnings will free up cash flow for investing in activity that can lead to revenue growth or support higher dividends to the owners.
The starting point is an exercise to properly benchmark your current overhead cost profile.
For an Auditel Strategic Cost Review contact Brian Bastible