Your Workers Compensation Program. Very few think about it.
This is exactly my point. Very few CFO's or Stakeholders within the middle market take much time to think about the real opportunity to improve their bottom lines, (or even top line growth equivalent) from workers compensation plan improvement. Let's analyze this to see whether or not this particular transaction has enough economic value to move it up the priority list.
Since Workers Compensation has both direct expense, (premium financing costs) and indirect expense (lost productivity, temporary staffing, keeping jobs open, etc.), it is important to understand that the scope of this discussion is much broader than our simple financial analysis indicates. In our discussion below, we are simply dealing with the direct costs affiliated with the premium and claims costs of an existing program.
Let's analyze two companies with similar size, industry segments, and employee counts. We'll assume both businesses are in the food manufacturing sector. We'll also assume both companies can be sold for the same EBITDA multiple of 7X.
Company A has 250 employees, has an average wage of $40,000 per employee, and a total payroll of $10,000,000. The average workers compensation rate is $15.00 per 100. Through poor claims management, and a lack of ownership and interest in their existing safety culture since the private equity acquisition, Company A has an experience rate of 150%. Their annual cost for workers compensation is $2,250,000.
Company B also has 250 employees, has an average wage of $40,000 per employee, and a total payroll of $10,000,000. The average workers compensation rate is $15.00 per 100. During the pre-acquisition due diligence process a consultant demonstrated that a significant improvement in EBITDA would result from making necessary changes to the claims handling and safety programs within the company. Through an aggressive strategy to implement a new program for safety and leadership aimed at dramatically reducing current and prior claims costs, Company A now has an experience rate of 75%. Their annual cost for workers compensation is $1,125,000.
The difference in EBITDA between Company A and Company B is $1,125,000! But remember our 7x multiple? That's right, the real value of the transaction at exit is $7,875,000!
A simple concept that should be an additional arrow in the quiver of Private Equity and their stakeholders.
Call me for questions.