Perhaps one issue raised frequently by Safety Directors and some of my other clients is how to convince a CFO and or CEO to invest in safety.
While in its simplest form what you are about to learn is fairly basic, it still addresses the real value that can be achieved by Safety Directors and Safety Officers looking to convince their C Level executives that safety is profitable. Or, perhaps in other words, lack of safety is expensive.
Let's compare and contrast two different companies with the same levels of staffing, exposures/payrolls, and classes of business.
For the fun of it, let's assume both companies are privately owned and the stakeholders of each company utilize EBITDA (EBITDA=Earnings Before Interest Taxes Depreciation and Amortization) to measure themselves, and are both anticipating selling the respective businesses within the next 5 -6 years.
Company A (Let's call them The Careful and Concerned Company, Inc) has an experience mod of 150%, pays $1,000,000 in workers compensation claims/expense, posts EBITDA of $5,000,000, and anticipates an exit multiple strategy of 7X EBITDA.
Company B (Let's call them The Not So Careful and and Not So Concerned Company, Inc. ) also has an experience mod of 150%, pays $1,000,000 in workers compensation claims/expense, posts EBITDA of $5,000,000, and has an exit multiple strategy of 7X EBITDA.
Both companies understand the value of safety, but only The Careful and Concerned Company makes fixing their safety culture a top 5 priority over the next 5-6 years while they get the company ready for sale. The Not So Careful and Not So Concerned Company, Inc. tries and tries, but eventually throws in the towel and gives up on fixing their culture.
Over the next 5 years Not So Careful and Not So Concerned Company, Inc. sees their experience mod spike up to 175%, while Careful and Concerned Company, Inc. takes the time to change their safety culture, manage their claims more efficiently, and makes great strides with the leadership team in charge of safety. Because of these changes, and the employees active participation in making Careful and Concerned Company, Inc. a safer place to work, the experience mod falls to 87%.
Not So Careful and Not So Concerned, Inc. sells for the 7x EBITDA multiple as does Careful and Concerned, but what happens to their respective stakeholders?
Not So Careful and Not So Concerned has increased workers compensation costs in year 6 of $1,166,666 (150% is to $1M as 175% is to $1,166,666).
Careful and Concerned has reduced their workers compensation costs in year 6 to $580,000 (150% is to $1M as 87 is to $580,000).
The stakeholders from Careful and Concerned have $586,666 ($1,166,666 minus $580,000 equals $586,666) in increased cash flow at the exit point.
Remember our 7x multiplier?
Careful and Concerned has increased it's distribution to its stakeholders by $4,106,666.67 (7x $586,666) while Not So Careful and Not So Concerned actually decreased its distribution because of their increased experience mod.
Safety pays, make it pay for you. Feel free to call or email me 661-332-0382 or cbaird@sullicurt.com.
