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Think like a buyer

Features - M&A Outlook

Increasing EBITDA in your company could be a few simple steps away.

Tom Fochtman | April 8, 2013

EBITDA is the standard and benchmark that most acquiring a company are going to review to assess the business. Your ability to increase your EBITDA will have a direct relationship on the value of your company and ultimately what a buyer would be willing to pay you for your company. So, how do you increase your EBITDA? Good news. It’s really easy.

I was with the owner of an $8 million commercial maintenance company recently and he commented that he had a really good year in 2012. Great! How good a year was it? He finished with a 7 percent net profit. I was befuddled by that. A really good year? 7 percent is a “really good year.” It’s pretty easy to move a 7 percent company to 10 percent. And if you can get to 10 percent you can certainly get to 12 percent.

And once you produce at a 12 percent level, the internal flame in your company starts burning blue and you will find ways to produce 15 percent because you are feeding on being an industry leader and a “best of class” company.

Here are some easy ways to produce a higher profit and increase the EBITDA in your company:
 

• Use routing software. If you are a maintenance, lawn care or any route-driven company, it is imperative that you employ routing software. With the cost of fuel and the rising cost of labor, you cannot operate efficiently without using routing software. It is impossible. Buy it today. It is a game changer and will save you money immediately.


• Implement job costing. I’m amazed at the amount of companies that do not use some sort of job costing.

It does not have to be overly sophisticated or detailed. At a minimum, you need to track your budgeted hours to actual labor used and worse case, you can do it in Excel.

The very best company that I’ve ever worked with routinely netted 25 percent profit every year and if you can believe this, in some years they produced at a 30 percent level. They had an administrative person work a noon – 8 p.m. shift and input labor from the time cards that were turned in daily.

The next day, there was a 60-inch monitor in the shop with all the jobs from the prior day scrolling on the screen.

All the jobs that were over budget were in red. The supervisors and foremen had the rest of the week to beat the budget on the upcoming jobs and a week to think about how they were going to make up the labor when they serviced the over-budget job next week. Guess what? The flame was burning bright blue in that company.


• Retain your clients.
Retention is vital to all route driven companies. It doesn’t matter what sector you are in; if you are not retaining at a 90 percent or better level, you are giving money away. The cost to replace work today has never been higher. You already have the client in your company. Now fall all over yourself to keep them.

High quality account management, the owner calling on the client, the occasional Starbucks card or movie tickets in the mail and a host of other things can be done to keep your clients. Buyers place a very high value on companies that renew their contracts at a 90 percent-plus level.


• Sell enhancements. It is rare that a company really focuses on the gold mine of revenue sitting right in front of them. Contractors act like it’s a gift when they get enhancement revenue. A gift? It’s your duty to show your customers how to enhance the value of their landscape with all the improvements they can make.

The 30 percent profit company? All their account managers were expected to produce $1 of enhancement revenue for every $1 of maintenance. It was expected and they were held accountable to produce it.


• Normalize your compensation:
As an owner, pay yourself what a good manager would make that is running your company for a new owner. Pay yourself what a branch manager would make. Take additional compensation out as an S corp distribution or if a C corp, a dividend. The reduction in your salary falls to profit, increases your net and increases your EBITDA.


I wrote about EBITDA in my last Lawn & Landscape column in January because it’s an important subject to address. Make sure you understand your company’s EBITDA and how it influences the value of your organization.

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