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05/29/2015

Increasing the corporate value and realizing a higher sales price

At an early stage before the planned sale of a company, strategic, sustainable and already implemented change processes provide the highest value added. However, if there is not enough time left, attractive "quick wins" can generally be realized, and the parallel, objective audit by a third party has a confidence-building effect and provides substantiated and well-founded arguments for sales negotiations. Corporate opportunities are assessed and allow the justification of a higher sales price. At the same time, the potential buyer is able to safeguard against purchasing risks.

The process for the preparation of the corporate sale of a company begins significantly earlier than many decision-makers are aware of. Successful preparation allowing a higher sales price to be realized will principally start with the company-own product and a profound understanding of its cost structures. Only those who understand the complete supply chain and the company-own production will be able to securely and confidently arrange the pricing and prevail in tough negotiations with substantiated and well-founded arguments.

Lean cost structures and efficient processes as value leverage

In order to achieve lean cost structures and also sustainably embed them in the company, it is first of all necessary to have comprehensive cost transparency over the entire supply chain. Many companies do not have the necessary knowledge and understanding with regard to their own suppliers and their processes. This will result in significantly increased development, procurement and quality expenditures and consequently inefficient structures. In this respect, cost engineering will provide support and create new perspectives. Cost or value engineering breaks down products into their individual parts. Subsequently, each individual part will be considered in isolation and its costs are calculated from the bottom up. Material costs, production costs, special direct costs, overheads and profits are ascertained and combined. The stage goal will be the preparation of a should costing model.

The should costing model

The should costing model presents the ideal product price which can be realized under the given framework conditions. The price split created will provide a new, differentiated understanding of costs. Detailed analyses of cost drivers are subsequently possible at manageable expenditures. It will be ensured, at the same time, that further resources for cost reduction are used at the right place and that they will be worthwhile. Moreover, it can then be precisely determined, for example, what the monetary benefits of a new manufacturing technology or new raw material may be and how profitable the associated investments are. In this respect, not only purchased components should be considered but also the company-own production.

Purchase price and prime cost analysis

A purchase price analysis can be directly used for subsequent price negotiations with suppliers which, time and again, will be remarkably successful. It can show, moreover, whether the present supplier or even the present country of manufacture is "the right one", or if fundamental strategic decisions need to be made. In a comparison with the purchase price analysis, the prime cost analysis is used for the optimization of the company-own added value. The detailed cost transparency helps to make well-founded and substantiated investment decisions without having to rely on assumptions and estimates for the ROI to be realized. Moreover, make-or-buy decisions can be made on a more solid basis – thus ensuring that company-own entrepreneurial core competences are correctly defined.

Early cost engineering provides room for maneuver

Ideally, cost engineering will accompany a product already in its emergent state. During the development of a product, a design-to-cost process can provide support. Thus, early on already, different variants can be evaluated in terms of cost and, as a result, may either be pursued or discarded without the need to invite offers from suppliers or the like already. The product development process may be pushed forward very efficiently and can be underpinned and supported, early on already, by information about the product costs resulting in the future. Before the first prototypes are created already, a value analysis provides the opportunity to define functions and clearly allocate the costs to them. Already during the development stage, the company will be able to decide – by means of market researches, sales and distribution experiences and by means of surveys – whether a particular function justifies the corresponding costs and whether they can also be covered on the market. If it is imminent that target costs will fail, it still remains possible – in an early stage of the development – to take initial action and thus ensure that target costs will be realized. Not only the purchasing department but also the company-own production planning will profit, early on, from cost transparency and can thus set up their precious time more efficiently.

Not only the cost side will profit

The sales and distribution process of a product optimized by cost engineering will also be significantly easier. Knowing both the company-own cost structure and its optimum setup will provide – by means of professional sales talks – successful access to the market since the costs of the product can be allocated to individual functions and explained to the customer. The target price already secured during the development will subsequently result in customer satisfaction to thus improve the sales situation as well as the corporate result.

Conclusion

The sooner a supply chain is scrutinized and a cost engineering approach pursued, the higher the added value for a corporate sale. On the buyer's or the seller's side, it is never too late, however, to achieve well-founded, professional and factually logical security through a corresponding objective assessment.

Güray Karaca is Chief Executive Officer of Kerkhoff Cost Engineering. Dominik Leisinger is Senior Consultant at Kerkhoff Cost Engineering. The company is part of Kerkhoff Group, whose five specialized companies provide solutions for purchasing management, supply chain management, lean management, value engineering, product cost calculation, risk & compliance management as well as supporting software solutions and interim management.