- Why we’re so damn busy working we can’t make any money
- Did you work on the right thing today?
- 3 Critical Rules for the day after you buy a company – to make sure you don’t miss a loan payment
- What about flipping a small business compared to real estate?
- Managing your Business in 2 Hours
- How we buy companies for under $5,000
Drop $40,000+ to the bottom line in 3 days and add $120,000 of resale value to your acquisition
By KC Truby
Our biggest fear of buying a small business is ‘how do I know we’re going to be profitable, enough?’ If you cannot find a clear path to double profits it may be a bad deal for you. That is why we comb the accounting records in the two weeks before we close, looking for that wasted overhead.
What is “Wasted Overhead?”
Money spent on anything that does not drive profit to the bottom line or work that can be computerized or outsourced because it is repetitive or can be digested down to a set of rules.
The best example is payroll. It follows rules set by the government and is repeated every Friday. This is an expense we should not be managing in-house and if you include the overhead allocation, it is far cheaper to give it to a local accountant.
Now the $40,000 move.
The next giant cost center to go in our opinion is the bookkeeper. A $15 an hour bookkeeper has a total burden rate of $32 to $36 an hour with all overhead allocations added back in. That’s around $75,000 a year for a part time job when you consider the number of transactions that go through your business every day.
We simply turn the bookkeeping over to a local accountant or bookkeeper with skills and experience in doing off site record keeping. Generally we pay around $20,000 to $25,000 a year for that service and in some cases it includes payroll.
That means $50,000 in savings, but of course I will not realize 100% of the savings – somewhere around $10,000 of cost will still occur internally with scanning documents and other miscellaneous cost. But that still leaves $40,000 of new net, which I created in the first 3 days of ownership. However, it gets better…
Now the $120,000 jump in value
Dropping $40,000 to the bottom line just added $120,000 to the value of my business when I resell next year at a 3 times trailing EBITDA valuation. We can sell for 3 or 4 times multiples because we create an operations manual and put a manager in place with all our acquisitions.
When buying a going concern we generally find that anywhere from 10% to 50% of the overhead can be reduced or eliminated. The outcome is we double the net profits without sacrificing gross revenue.
This is just one line item of the hundreds you must review before taking the reins of your new business.