Steamlining sales and costs for profit
When I picked up last month’s issue of MHW I went through my monthly ritual of scanning the contents page and was surprised to see John Walker’s article titled “Sell Your Dealership.” My initial thought was John was straying out of his area of expertise and into mine, and that I would have to have a chat with him about it. On occasion, I might comment on the need for strong product support efforts to cover the absorption factor, but never get into the details because I know John would is looking over my shoulder. But after reading John’s story it became clear that John was not referring to selling the company but to “selling the company” in terms of marketing the company’s products and services to both existing and potential customers.
Thinking about it further I believe that both topics kind of fit together because a strong product support program is required to get the kind of value you need for your company from a qualified, informed buyer.
What is one of the first things you would ask to see pertaining to any target you have decided to investigate…..it would be the sales mix and the margin analysis. In other words the sales silos and the contribution margin from each, and how much each department supplies toward a 100% absorption factor. If product support margins exceed the benchmarks you use you would check to see that the results stated were in the ballpark and then would be more inclined to pursue the acquisition further.
In terms of streamlining (or profit enhancement) is concerned, dealers have to review both sides of the sales silo. In other words, both the sales and cost side of the equation. As you probably know a small increase in the sales price of any product or service provides the largest change to the bottom line because it is the largest number on the income statement. Adding 5% to sales versus reducing cost by 5% is not the same thing. Try this exercise regarding new equipment sales and you will see what I mean.
It really makes no difference how you streamline the business, the goal is to do it. Take action and do it. I for one believe there is room on both sides of the sales equation. On the sales side we can review the latest and greatest in marketing to make sure we are touching existing, past and potential customers. If you “pay” for new business, for new customers, have attractive commission rates for higher margins I can just about guarantee overall higher margins and sales numbers.
On the cost side in most of the sales silos you have the ability to trim costs or to “streamline” process to reduce labor, overtime, materials, delivery charges, etc. If you make it worth the effort for the department managers they will reduce those costs by 2-3%. If they get it done pay them a $5000 bonus and tell them to do it again.
The real risk dealers have right now is the pent up inflation risk. Keep pumping funny money into the system and sooner or later (probably sooner) you get inflation. It would be prudent going forward to carefully review purchase contracts for conditions that automatically increase prices. Having a couple of vendors on board for major expenditures is a must these days to keep your current vendor honest. As our old friend Al Bates says….pricing has to stay ahead of payroll cost increases if you hope to remain in hi-profit status.
Where dealers probably have the most problems controlling costs is in the product support silos because of the variable nature of both the revenues and costs in these segments. But no matter what efforts are required to control these areas, it has to be done because these revenue silos produce healthy gross profit margins and contributions to the bottom line. Inspecting the operating results for service, parts and rental on a daily basis helps keep these very important areas on track and thus overall profits and absorption where they need to be.
How much value would you put on strong product support results? Quite frankly a lot, because if I was in the mood to expand my business I would be more inclined to buy the dealer who has attained and maintained above average product support margins than one with weak parts and service results. I suppose you could find a dealer who had a good sales year last year that might interest you, but we all know the sales numbers can move around pretty easily, while strong product support margins lead one to believe that downside risk is minimized because the target must be doing a good job with customer service, customer service with staying power that can be carried over to the new owner.
Speaking of selling the actual business there has been activity on the M&A side for dealers needing to expand their coverage, and for dealers that no longer feel the company can sustain the financial strains it needs to deal with. Other buyers are expanding their potential markets by buying complementary operations outside their current line of business.
If you find yourself on the sell side, the pricing may not be as bad as you think because low interest rates require lower debt service that provides more free cash flow to cover principle payments. More free cash flow means there is more to pay for the business that would normally go to cover interest expense. Even Warren Buffet says he walked away from a deal recently because the purchase price was pushed too high because of the availability of additional free cash flow resulting from low interest rates.
If you find yourself on the buy side you can also take into account that debt service costs less than it did ten years ago. I don’t believe I would use these funds to increase my offer for the business, but knowing I had this cushion in my pocket would encourage me to stick with the dealer longer before pulling the plug.
So no matter how you look at it, “Selling your Business” helps you really sell your business and encourages a buyer to maybe move the price higher because you have a strong consistent parts and service business.
So maybe John was right ……maybe because you “sell” your business you get to sell your business for a premium even during these tough economic times.
Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail firstname.lastname@example.org to contact Garry.