Case Studies

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!


Case Study: Finding the Strategic/Synergistic Buyer

Often we find that buyers of companies are looking for more than earnings.  In those cases, they are looking for other value drivers that may be hard to find, including skilled workforce, a desirable location, a customer list, intellectual property (IP) or required licenses.  These are assets that the selling owner might not be able to completely capitalize on, but a buyer might.  Monetizing an asset that may not be reflected in the bottom line is a bit tricky, so we focus on buyers that can be made to understand that an off-balance sheet asset is worth paying for.

In one instance we found the ideal strategic/synergistic buyer for the sale of a nationwide security guard firm.  The selling company had a narrow focus; specializing in only one major industry. The company guarded industrial plants in rural areas spread throughout 19 different states.  Being nationwide contributed to their higher than typical industry expenses and lower profits as compared to others in the industry who concentrated on geographical markets.

However, the critical assets the company owned were the licenses to conduct business in those 19 states.  Licenses are expensive to attain and maintain, not because of the actual cost of the license, but because of the time consuming process of qualifying individuals in each state.

We targeted security guard companies that provided services in industries that were not serviced by our client, and we found one who wanted to be licensed in these 19 states. That buyer provided security services for the cruise line industry and operated in California, Hawaii, Alaska and Florida.  Our client’s customers were located in states that happened to have big cruise destination ports like New York, Maine, Louisiana, Mississippi and Alabama.

The buyer was not necessarily interested in providing security services for industrial plants, but he wanted to be in some of those 19 states and could overlook the fact that the seller’s company was not highly profitable.  The buyer determined that as long as the existing business continued to be even slightly profitable, he was interested in the acquisition.  Why?  Because he was certain his own business’ sales and profit would double or triple if he was licensed in a few of the 19 states.

This example demonstrates why it is important to find the strategic/synergistic buyer; the ones who will pay more because the acquisition of the target company will usually produce opportunities to also make more money in their existing business.