When a Dollar Saved is $7 Earned

So when does a dollar saved turn into $7 earned? It’s when you can create $1 in EBITDA and leverage it as a multiple in a deal transaction.

Once scenario is when you’re the 1st generation business owner, your kids want nothing to do with the business, and its time to cash out. A second scenario is when your business is held by Private Equity, and you earn out based on the EBITDA value you create between the time its bought and sold.

Either way, each dollar you can send to the bottom line becomes a MULTIPLE (anywhere from 3x to 10x, depending on the size and type of business).

Often, during the valuation process, opportunities are identified to increase EBITDA within the business.

Translating these opportunities into real dollars often takes some work, but its not as hard as you may think. Sometimes all it takes to identify the dollars is an outside perspective with a fresh set of eyes.

Recently I had the opportunity to help a manufacturer of replacement parts capture additional EBITDA dollars. Margins on the parts were great, the challenge was the overtime needed to get those parts through the plant, doing it “the same way it’s always been done”.

When volumes were lower, the “as is” processes was sufficient, and on time delivery was fair (in the low 90%’s). As volumes increased due to consolidation of the manufacturing footprint, on time deliveries with the “as is” process dropped significantly, and the overtime required went through the roof.

Stepping back from the process, we were able to identify several quick wins that would enable the leadership team (without any outside resources) to improve deliveries and reduce overtime. We also quantified the return on investment to drive a step-function improvement if they implemented standard work processes in a drive to improve customer satisfaction as well as EBITDA performance.

A win all the way around, and an example of how a dollar saved can be $7 earned.

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