Maximising the sale value of your business

<br /> Brian Bastible

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Brian Bastible

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

What is Strategic Cost Management?

<br /> Brian Bastible

Posted by:
Brian Bastible

Strategic Cost Management is a term that is regularly used in business but what does it mean?  A client asked me the other day what Strategic Cost Management is, so I gave my usual reply but on the way home thought, that is a really good question.

As so often is the case, the words themselves tell us the meaning but we just need to stop and think about it.  I picked up these definitions from research but I think they work well.

Strategic

Relating to the identification of long term or overall aims and interests and the means of achieving them.
So there must be a purpose, an end game or a place where we are trying to get to.  Crucially we need to understand what the strategic goal or objective is.

Cost

The expenses that we necessarily incur in the pursuit of those strategic aims.
In business this can normally be broken down into 3 broad areas;
1. The cost of core functions or operations. What we must spend in developing and delivering our product or service.
2. The cost of acquiring, retaining and growing our customers. Cost of revenue acquisition.
3. Activities that support core operations and customer activities for example, IT, Telecoms, Accounting, General Administration, etc

Management

The process of reaching organizational goals by working with and through people and other organizational resources.
Management has the following 3 characteristics:

1. It is a process or series of continuing and related activities.
2. It involves and concentrates on reaching organizational goals.
3. It reaches these goals by working with and through people and other organizational resources.

Strategic Cost Management is the ongoing process of ensuring that an organisation has the right partner suppliers, at the right service level and at the right price to ensure that the organisation can deliver its long term goals and objectives.

It makes so much sense when it is described like that so all businesses must be doing this. Surprisingly no, separate research by Management Today and Accenture shows that only 30% – 40% of organisations consider their own cost management activities to be strategic.

Why? Time, knowledge, resources, tools?

The interview by Management Today with Chris Allison, CEO of Auditel addresses some of these questions.