I spoke to an office equipment dealer last week and he had just released a senior sales member on his team. I asked him why and he gave one answer: EBITDA. Earnings Before Interest, Taxes, Depreciation, and Amortization has become the watchword in our industry, and with all the issues that the Clover Technologies debt and loan issues have stirred up, it got me thinking that EBITDA is now driving our industry. Let me explain why.
A lot of M&A activity is happening in office equipment today, and the primary means of business valuation used is a multiple of EBITDA. A fair base for EBITDA is 6x. So, if your number is $500,000, your company has a value of $3 million. Simple, right? Now, imagine an employee like a sales VP or a senior service technician, with a wage of $80,000 per year. That wage reduces your EBITDA by $80,000, so, that employee is costing YOU, THE OWNER, a whopping $480,000 in company valuation.
Revenue is Vanity, Profit is Sanity
We’ve always known that profit (often substituted for EBITDA) is what’s important, but many businesses are built to grow. We forgo profits in the name of increasing revenue. Business owners often think “when the time comes,” we can focus on profit. When it comes to office equipment, organic revenue is no longer increasing. The focus must be squarely on how to lower costs because, in a flat revenue environment, costs are the only lever you have to increase EBITDA. You maywant to increase revenue. You hope you can, but you arecertain that if you reduce a cost, the savings will flow directly to your bottom line, and hence your business valuation.
If your goal is to eventually sell to one of the aggregators, or as an owner you want to take more money out of the business, EBITDA must be your focus. How does this tie into Clover? Well, much of their original loan was used to pay shareholders a dividend. That’s a great idea, but you better generate the profit to pay that loan back. Investors are not confident they can, and now it's a big issue. If the market was confident they could pay back a loan, they would continue to lend them money.
A look at any dealer’s income statement will quickly isolate the problem: the line item is often called SG&A, or Selling and General Administrative Expenses. In a mature market, such as office equipment, dealers spend too much of their gross margin on sales. If you look at those expenses closely and could match sales expenses between new revenue and existing revenue, my bet is you would be shocked.
Turning over leases is not new revenue. Increasing your footprint inside an existing account is also not "net new". It's time to be ruthless as a business owner and decide if the sales investment you are making in securing new business is costing you EBITDA and therefore, reducing the value of your business.
Reducing headcount and managing the business is not easy, especially if you, the owner, have been focused on new business for so long. There is also the HR issue: those left after a headcount reduction will consider if the business and industry itself are worth staying in.
MPSToolbox exists for this exact reason.
When you make changes to your business by reducing headcount, the remaining employees will need a new strategy to rally behind. Your remaining staff will instinctively know that e-commerce and digital workflow have become a big part of their personal lives, and the same is/will be true for the business.
The upside to this is that an investment in e-commerce and digital workflow is a fraction of the cost of a new (or replacement) outside salesperson. It also leverages the existing team you have in place such as contract teams and inside sales reps, to take on a more prominent role in the organization (think: empowerment). Perhaps most importantly, it drives the company to focus on increasing revenue, and profit of existing accounts by enabling customers to purchase 24/7, across hundreds of thousands of products.
The best thing about focusing on EBITDA? It means that the cost of doing nothing is exponentially more expensive to you, your family, and your shareholders than changing your strategy.
The future is bright for dealers that embrace change.