How The Wrong Employee Benefit Strategy Could Cost Manufacturers 6x in a Merger or Acquisition

As the CFO of a manufacturing firm, we don’t have to tell you that companies are buying and selling their businesses based on a multiple of EBITDA, earnings before interest, taxes, depreciation and amortization. What you likely don’t know, however, is you’re leaving money on the table if you don’t take an analytic look at each firm’s employee benefit strategy in the process of evaluating your merger or acquisition.

A Narrow View

Most insurance brokers who work in the manufacturing mergers and acquisitions space don’t take a sophisticated look at benefits. For example, if they’re working with the buying entity, they’ll take a superficial look at the benefit plan of the selling business and tell their client, “Hey, our single rate is $398 and the single rate of the company we’re buying is $450. We’re gonna save money when we move everybody onto the same plan.”

At DCW Group, we use our decades of healthcare-specific knowledge to take a deeper dive into the workings of the health plan — and find significant savings. What the broker in the example above should have said is, “Hey, the company you’re buying is not currently getting their pharmacy rebates. Based on a projection of $18 per insured per month, we can immediately generate $332,000 of free cash just by keeping those rebates.”

At a multiple of six times when you’re buying the business, that means there’s $1.8 million that they seller is losing in the sale price because they don’t realize employee benefit strategy can play such a large role in generating EBITDA.

Profit Versus Loss

Let’s look at previous transaction in reverse. Say you’re the selling party in this scenario, we can help you free up that $332,000 in cash through your employee benefit strategy. If your sales multiple is six times, you just made an additional $1.8 million on the sale of your business. That pharmacy rebate is now on the books as profit for your company, rather buried in SG&A.

Right now, those rebates are an expense getting lost in the health plan. If you redirect that to your bottom line, it ups your earnings number and ups your buyout.

Freeing up such significant savings from the health plan gives the party that knows about the opportunity — be it the buyer or the seller — leverage to make negotiations or even concessions in other areas of the business deal. For example, if you’re the purchaser process and you know you’re going to be able to immediately generate $332,000 in savings by altering the pharmacy benefit plan of the company you’re buying, then you’d be more willing to pay a higher price in real estate costs, keep on high-paid employees, or compromise on another factor that might otherwise have been a sticking point.

Employee benefit strategy stretches far beyond pharmacy benefit rebates and this savings potential is just waiting to be unlocked. Be it from the health plan’s provider network, provider reimbursement model, or other areas, don’t miss out on potential savings simply because you didn’t know they existed.

In other words, stop looking at the M&A deal in totality. As adviser seasoned in the inner workings of employee benefits strategy, DCW Group will help you to free up money, so that your firm can use that to your advantage in your next acquisition.