The UAW strike was settled in October. The new contracts will significantly raise costs for the automakers; one union leader was quoted as saying, “We wholeheartedly believe our strike squeezed every last dime out of General Motors.” The agreements include a 25% wage increase — more than all the raises that auto workers have received over the last 20 years combined.
It’s safe to say that labor costs are going to have a significant impact on the automakers’ profitability and competitiveness over the next few years and will likely have a trickle-down effect on other manufacturers that compete for the same labor pool.
You may not be one of the Big Five automakers, but it’s possible that your costs have, over the years, inched up so that a buyer may start to question the total value of your business. It’s a good idea (especially as we approach the end of the 4th quarter) to audit your costs and see if they are in line with industry and regional standards.
You already know what your basic expenses are: labor, raw materials, equipment, rent, supplies, and overhead. If you’ve been letting staff manage the day-to-day operations, you might not have noticed them creeping up to become out of balance. Most manufacturing companies, for example, should have labor costs that are 30% or less of gross sales. The actual percentage can vary quite a bit from niche to niche. However, the labor shortage of the past couple of years has forced employers to raise entry-level pay rates and pay more for the retention of their best talent.
In addition, the cost of materials and shipping increased during the pandemic lockdowns – and hasn’t yet come down to pre-pandemic level – and interest rates and the burden of debt service have also increased dramatically because of inflation.
You’re certainly not alone in experiencing these issues, of course, but if you’re thinking of selling your business over the next couple of years, out-of-balance costs may have an impact on the value of your business. One way to determine if your company’s costs are in line with your competitors is to refer to industry research databases like Profitcents by Sageworks. Or, you can connect with an industry organization trade organization in your specific niche. You may have a local manufacturer’s group or mastermind group, but you can also join the National Association of Manufacturers (NAM.) The organization provides industry insights and research to support manufacturers.
One challenge for smaller manufacturers or manufacturers of very unique products is that the data in many of these databases tends to be skewed towards data from larger companies in more predominant niches and may not provide an apples-to-apples comparison for your needs. Of course, it is unlikely that your immediate competitors will be open to sharing information with you in a collaborative manner. That is where one can benefit from the power of joining a peer group with a network of manufacturers all over the country. While your local/direct competitors won’t want to share information with you, a company like yours in another state or one that targets a slightly different customer base may be more open to exchanging information with you. Entrepreneurship can feel rather lonely at times. Imagine the benefits of being able to pick up the phone to benchmark your financials or to discuss other challenges with someone in the same business as you. Wouldn’t that be a game-changer? If you’re looking for a peer group to join where you can build such collaborative relationships, you can contact us for a referral.
What if you discover your costs in one or more categories are out of line? Fixing expenses can be expensive in itself; hiring an auditor or consultant to help you get a handle on your costs takes time and money. Whether you choose to make the investment depends largely on your timeline for selling. If you have a few years before retirement or selling, the process of analyzing and fixing costs may have a significant return on investment.
It’s also why increasing prices are essential to maintaining your company’s value.
But if you don’t have the luxury of time, out-of-line costs don’t alone make your company unsellable (unless you’re not profitable.) However, it’s important to understand that you may be selling at a discount compared to a business with more optimized costs and pricing in place.
Buyers will look at your financials and try to find where they can earn economies of scale or get your costs in line. Every dollar saved is a dollar that falls to the bottom line or can be used for further investment. This is how good buyers analyze companies. Your pain will be seen as their gain.
Automation, management information systems, or staffing model and vendor changes can all reduce costs. Even if your labor costs are not rising dramatically now, they will be soon. Minimum wage across the country is on the rise. In California, fast food workers will make a starting wage of $20 per hour in 2024. That’s going to cause wage increases across multiple industries.
If you have a fast-approaching sale timeline, an experienced business broker can help you by providing an analysis of your company’s value and how your costs impact it. They can also provide you with advice on how to prepare your business so it aligns with industry standards and buyers’ expectations.
A good first step is to find out what your company is worth now.
