Case Study: Reducing Overhead Expenses through Consolidation
There are many instances when the selling company has high revenues but little profit. We like these challenges because with proper research and examination of the financial statements, we can usually discover some possible savings through consolidation. An industry comparison analysis can determine just what is thought to be “normal” for the industry. We key in on cost of goods, payroll or other pertinent expense items that are relevant to the industry.
Take for instance our sale of a help-supply firm. We knew that their biggest expense was payroll and all the associated labor burdens. With the assistance of an insurance broker we learned that this $10 million dollar revenue selling company could significantly reduce their workmen’s compensation premiums if the acquiring company had at least $15 million dollars in annual revenue. Savings like this is possible because larger firms can self insure at higher levels, thereby reducing their premiums. In this case, the savings in premiums was $800,000! This $800,000 dropped down to the bottom line into earnings. According to the insurance broker’s report there would likely be even more workmen’s compensation savings for the Buyer’s company. A merger of the two companies would result in substantial workmen’s compensation savings and increased the value of the merged companies.
In our presentation to prospective buyers we made that assumption in our adjustments and projections. We found a number of buyers willing to pay extra for these savings. The result was the seller received a fantastic multiplier off his low earnings and the buyer, based on his own analysis, paid a reasonable multiplier of his anticipated earnings. A clear win-win situation!