Understanding the Force Multiplier Effect of Employee Cost Savings When On An Exit Path
Walter Adamson
? Helping business owners transform every role with AI-Thinking to boost productivity ? Empowering human potential one person at a time by enhancing productivity and role deliverables ? Beyond AI to AI-Thinking
When on an exit path, you owe it to yourself to examine all expenses, particularly the value added by every employee position relative to the costs.
Every dollar saved becomes a force multiplier via the EBITDA
Employee costs are likely a significant part of your overhead expenses. Therefore, one cut makes a worthwhile difference to your future wealth. In addition, every one dollar saved becomes a "force multiplier" when it transfers from costs to EBITDA.
An EBITDA multiple of 4 applied to total savings of $100,000 delivers you $400,000 upon sale, and a multiple of, say, eleven, provides an extra $1.1m for your family.
Some types savings are relatively easy to achieve, such as terminating leases or cutting back on some owner perks. However, assessing the cost-benefit of every employee position requires a different approach, which takes into account the following:
I'll discuss these below in the context of your wishing to position your business for sale to a strategic buyer and therefore requiring a solid forward earnings posture.
(This discussion is not in the context of treating people as numbers and not humans. It is in the context of you having given this deep thought, possibly already having something in mind with regard to a tightening of your workforce, and looking for a final reason to act.)
Timing the cost-benefit analysis - starting early matters?
It's a truism that starting an exit strategy early enough to build on your strengths is best. However, an early start also matters just as much for getting accounting recognition of the trimmed costs.
The savings you make that have dropped into the latest statutory accounts are by far the most valuable compared to those that require explanation by an adjusted EBITDA. Their value is because a buyer needs to be convinced of every element in an adjusted EBITDA, whereas due diligence of the statutory accounts and the derived EBITDA is transparent.
EBITDA justifies itself whereas you will have to justify every adjustment in an Adjusted EBITDA.
Therefore, position reductions need to be actioned in time for their full savings to make it into the last statutory accounts before you envisage communications starting with potential strategic buyers.?
Given that rationalising positions may incur additional short-term costs, you should also consider this in your timing of the review of employee positions.
Cost-benefit analysis for the current business
In a well-run business, you, as an owner, know whether you should target specific areas for this review of positions or do it across the company.
A significant advantage of this review early in your exit journey, in addition to that mentioned in the previous section, is that you can decouple it from any rumours or unplanned communication about your positioning of the business for sale.
Done early, it is simply a routine business efficiency review with a focus on people. Your middle management can activate this review if you have to many employees to do personally.
It is a fact for most owners that if you started the business today from a clean sheet of paper, you would not do it the way you are doing it now. On top of that, there are always some organisational issues and technology shifts that require a rethink and refreshing of how you do things. So there is always a rationale for a review, even if your thoughts are about heading towards an exit.
A practical method is to deploy a "position criticality matrix" in which every employee position is a row (position, name), and the columns contain at least:
By scanning this completed matrix, you can focus on the low-hanging fruit quickly. In some of these cases, it may be evident that you can make savings without harming the current business operations.
However, in most cases, it will require your on-going focus and attention to decide how to proceed with the subset of people whose positions require further analysis. This work is not easy, but the effort is worth it.
Cost-benefit analysis of positions necessary for the future business
Cutting costs today at the expense of achieving your 5-year outlook is a false saving, especially if you wish to attract a strategic buyer who is motivated by the forward earnings
Therefore the last thing you want is to let people go who could make a positive contribution to future business operations today as what they might be lacking is something that you can provide e.g. opportunities for personal growth, improved engagement or relevant training.
A common challenge is that only some businesses have set clear goals and objectives for each employee and business unit. Without such clarity it is challenging to assess if an employee's talents are optimal and aligned with the future needs of the business.
There is no exact way to do this. It likely all comes down to you since you have successfully built the business, you are an excellent judge of people and their capabilities, and you know the future growth plan.?
There can be a timing challenge.
Ideally, you should complete this employee position review and finalise the actions in the statutory accounts cycle one ahead of the most recent one available to buyers.
This timing challenge requires starting your reviews at least 18 months before you anticipate a sale transaction commencing. At this time - 18 months before - your 5-year forward plan will be less actionable than one which will convince a strategic buyer of the forward earnings you anticipate.
Determining the fit between people and future needs will always be more of an art than science. Despite this, it is essential to assess employees and positions under review against their potential contribution to future business operations.
Takeaway
By closely examining the cost and value-added of each employee position, you can make informed decisions about how to improve the bottom line for the current and for the future business.
It is vital to guide your decisions by what will make the business more attractive to potential buyers. Keep in mind that all the too-hard decisions that you avoid will most likely be quickly executed by a new owner. And the benefits will accrue to the new owner, not to you and your family. You've worked hard for it - make the hard calls.
Finally, by presenting a lean and efficient business to a potential buyer you will build their confidence in you, in middle management and in the continuity of revenue and performance.
In this way, you will increase your chances of achieving the peak exit value for your family.
领英推荐
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This Week's Reading
Two articles from my reading list to help you grow and exit successfully.
Article 1: 12 Effective Strategies For Aligning Talent And Business Goals
The Forbes Human Resources Council is a group of experienced HR professionals who have come together to offer their insights on how businesses can better align their business goals with their available talent pool.?
The council unanimously agrees that businesses should take a strategic approach when aligning their business goals with their talent pool.
They advise companies to assess their current talent pool and identify gaps. Once gaps have been identified, businesses should then look to purposeful recruiting and training to fill those gaps. Finally, the council advises businesses to create a system in which all employees know the company's business goals and how their roles contribute to them.
By taking these steps, companies can ensure that they are making the most of their talent pool and purposeful aligning their business goals.
Source: Forbes
Article 2: Aligning employees to business strategy - The Predictive Index
The most successful companies align their entire workforce around a common purpose.
They do this by creating a shared understanding of how the company works, what success looks like, and how everyone contributes to achieving that goal.
The research behind the Predictive Index found that four key factors determine whether a company is likely to achieve alignment across the organisation.?
These are:
1. A clear vision statement;
2. An effective communication plan;
3. A culture of collaboration; and,
4. A strong management team.
They call these the 4 P’s of Alignment - "we believe that every company needs to address these areas to become a truly aligned organisation".
Source: predictiveindex.com
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This Week's 3 Business Books
Free for you as a subscriber to my newsletter: Three of the world's most essential and popular business books in acclaimed 12-minute videos. Listen, or watch and listen to take advantage of another big idea.
Book 1:?Buyology by Martin Lindstrom (watch on Monday-Tuesday)
If marketers could uncover what makes us choose one brand over another, they would have identified the secret to success.?
This discovery is what Martin Lindstrom calls our Buyology: the subconscious thoughts, feelings, and desires that drive our purchasing decisions daily. And he believes the future of marketing is to honestly and thoroughly understand consumers' thoughts, feelings, motivations, needs, and desires.?
Book 2:?Originals by Adam Grant (watch on Wednesday-Thursday)
Unreasonable men and women (whom Adam Grant calls Originals) have been moving the world forward since the dawn of time. Some of those people you've heard of, like Martin Luther King and Amelia Earhart. You might have yet to hear of others like Ray Dalio and Neil Blumenthal.
But what exactly does it mean to be original? Is it something that someone can teach? And if so, what do you need to do to learn to become an Original yourself?
Book 3:?Extreme Ownership by Jocko Willing (watch on Friday-Sunday)
What if leadership were literally life and death? Find out how the Navy SEALs lead to keep their teams alive and how you can apply these "Extreme Ownership" principles to your business.
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Keep winning, Walter
P.S.?If you know you’re ready… it might be time to explore my?Proactive Exit Mastery?model, to see how you might capture the ultimate exit value for your business.?If you'd like to know a bit more, just message me or comment below with "Ultimate Exit Value".