When I sold my company a few years ago, I learned a brutal lesson: our overheads made a real impact on the price. Had I got the company into better shape first, it would have been worth more.
It goes without saying that the more profit the company makes, the higher the price a buyer is prepared to pay.
Like most business owners, I focused on maximising sales and preserving margins. The more we sold, and the higher the profit per unit, the better.
However, I didn’t manage my overheads particularly well. We were paying far too much for telephones, card processing, insurance and couriers.
This amounted to around £12,000 a year, which may not sound like much – but as the company sold for an effective multiple of 6 x EBITDA (net profits), the sum paid was some £72,000 lower than it might have been. I have on occasion wondered what I could have done with that extra cash!
What is more, I had some rolling contracts with suppliers (for example, the landlord) which still had several months to go at the time of selling. The buyer did not require these and my payout was chipped away further as the buyer deducted termination costs from the asset value of my company.
So, while I was very happy with the price my company fetched, I could perhaps have added nearly £100,000 to its value – simply by managing my costs more effectively.
So how can you assess your costs?
Start with a quick look at your nominal ledger. For most companies, wages and rent are the major items, but it’s not easy to minimise these without damaging the very engine that makes you money.
The costs you can control (and almost certainly haven’t) come in the form of myriad small leaks that add up to a torrent. Typical culprits include utility bills, stationery, cleaning materials, phones, logistics, fleet, workwear, insurance, photocopying and bank charges.
In many cases, you will have been using the same supplier for years, even though your usage and profile has changed dramatically. What might have been a good deal five years ago when you were much smaller might not be competitive now.
You are perhaps using much higher volumes or have changed your purchasing pattern. If you haven’t managed your suppliers and contracts carefully, there are bound to be savings somewhere.
Well-managed overheads ensure that operating profits are at a maximum. They are also a good reflection of the management team’s ability and attention to detail.
From a strategic point of view, cash tied up in running costs can’t fund production, prime the pump for growth or pay dividends.
In the run-up to sale, all your energies will be focused on building the company up and helping buyers do their due diligence. Wrangling with suppliers will be the last thing on your mind.
You’ll also want to keep the planned sale confidential as long as possible, so rather than ask your staff to negotiate better prices, you might want to consider outsourcing cost management to a specialist.
Even if you’re a long way from putting your company on the market, you would be well advised to get on with cost reduction as soon as possible! Buyers will want to see three years of audited accounts and your latest management accounts – and a set of good numbers put you in the strongest possible position to bargain for the highest price.