IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses.  The following blog has been provided by Bruce Follansbee of Expense Reduction Analysts (www.expensereduction.com):

Why Hiring an Expense Management Firm Post Acquisition is Good Business

You’ve found the diamond in the rough. You see opportunity where the seller might not have. Part of that opportunity may be hidden cash flow in the business’ indirect expenses.

This past summer Zachary Scott, a respected Seattle firm in the M&A space, wrote the following in its newsletter In$ight: “Product mix shifts, price increases, economies of scale, and commodity cost declines, among others, are valid reasons for gross margins to change over time. Some of these costs are fixed in nature and can affect gross margins depending on what point in the demand curve the measurement is taken. Most often improvements in margin below the gross margin level are achieved by cutting overhead costs. This is easier to implement but harder to overcome if the support requirements for the business are harmed. Cutting overhead in high growth companies can be counterproductive.”

The article makes an excellent for case for engaging an expense management firm such as Expense Reduction Analysts. Yes, reducing overhead, or indirect costs, can be harmful as all too often, if not implemented correctly, the cuts come with a reduction in service levels. As most SMBs typically don’t have the resources to be experts when it comes to indirect costs, they either willingly accept the trade off, or in some instances don’t realize what they’ve bargained away until it’s too late.

In addition, if you have just acquired a business, and you’re like most new owners, your time and cash are going to be focused on the core business.

Consider the following when choosing to engage an outside firm:

• Paid on Results – Select a firm that has skin in the game and is paid on results. Not forecasted results, but realized savings that you can in turn direct to more strategic initiatives. If no savings are found you shouldn’t have to pay any fees – period. Any recommendations your advisor makes for savings should be as good or better (in your eyes and those of your stakeholders) than you are using today.  As the Zachary Scott article implies, any reduction in service levels from your suppliers can negatively impact your business and potentially your customers’ satisfaction.
• Insider Knowledge – Select a firm whose subject matter experts have extensive supplier-industry knowledge of the indirect expense categories they review. No single advisor can possibly have a deep understanding of what could be forty different indirect expenses.
• Don’t Pay for an Instruction Manual – Select a firm that will do the work and not just tell you what to do. Your people already have their plates full, and as stated above, probably aren’t as knowledgeable about indirect expenses as they are about your direct costs. After all, just as your employees focus on their areas of expertise and know them better than anyone else, you want the advisors working for the firm you select to be just as knowledgeable in their respective expense areas.

If you’d like to discuss specific strategies for operating cost expense reduction, I would welcome the opportunity to have a conversation.

Bruce J. Follansbee of Expense Reduction Analysts has numerous years of experience working with privately held companies on operating cost expense management. Expense Reduction Analysts has been a market leader in this specialized professional service since 1992. If you have questions about the content of this article or any area relevant to Mr. Follansbee’s expertise please contact him at (425) 629-3731 or bfollansbee@expensereduction.com.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.