Don’t assume, know the answer and be ready to impress a future acquirer
Ask yourself this question – how do you know each day, each week or at least each month whether your labor is performing efficiently? And think about all areas of your business, all labor, not just direct labor.
Your direct labor is the easiest to monitor efficiencies, or productivity, simply by measuring output (i.e.: Revenue or Units or Hours Billed, etc) to the labor cost. But are you monitoring this closely? Some will say they monitor the gross profit as this measures their direct labor performance and that is true, but the gross profit is also greatly impacted by sale price and by material costs. Sit with your bookkeeper, controller or CFO and talk about what visibility you’re getting directly into the labor efficiencies.
And also think about your non-direct labor and your sales, general and administrative labor. What measures do you have in place to determine whether these groups are becoming more or less productive over time. Is your order entry team processing more or less orders than they used to? Is your customer care team handling more or less calls per hour than they used to? Is your IT team handling more or less service tickets than they used to?
Because we do a lot of M&A work and help our clients do acquisitions, we regularly come across Sellers who really don’t understand the efficiency, or lack of, within their labor expense. And not knowing, not managing it effectively, could have you leaving a lot of money on the table at time of selling your business. You’ll miss out because your profitability will be less than it could be so this allows your acquirer to offer a lower purchase price. Yet when they acquire your company and address any labor inefficiencies, they will reap the rewards that you should have.
Take the simple step of sitting with your financial partner and discuss how to ensure you have good line of sight to your labor efficiency. Using time as a friend in evaluating this could reap very nice reward for you down the road when you look to sell.
