Using the High-Low Method to Optimize Costs for a Higher Sale Price

Selling My $5M Business

Executive Summary

Imagine adding an extra $250,000 to your client's bottom line before they even put their business on the market. By using Golden Door Asset's High-Low Method Calculator, John, a landscaping business owner, was able to identify and reduce variable costs, directly increasing his business's valuation by 5% and paving the way for a successful sale. Discover how this simple, yet powerful tool can unlock hidden value for your clients preparing for a business exit.

The Challenge

Registered Investment Advisors (RIAs) are increasingly tasked with providing comprehensive financial planning services that extend beyond traditional investments. According to recent industry reports, over 60% of RIAs now offer business advisory services, recognizing the significant impact a business's financial health has on an owner's overall wealth. This demand is especially high among baby boomer clients looking to sell their businesses and transition into retirement. One of the biggest challenges these business owners face is maximizing their company's value before a sale. Many owners, deeply involved in day-to-day operations, overlook opportunities to streamline costs and improve profitability, ultimately leaving money on the table during the negotiation process.

John, a 62-year-old owner of a successful landscaping business valued at $5 million, faced precisely this challenge. He was preparing to sell his business but needed to understand and potentially reduce his operational costs to increase profitability and, ultimately, the final sale price. He suspected certain variable costs were higher than they should be, but needed a simple, reliable method to pinpoint the biggest opportunities for cost reduction before due diligence began. He'd heard that the "High-Low Method" was easy to implement but wasn't sure how to get started or if it even applies to his business. Without understanding these cost drivers, he risked undervaluing his business and potentially losing hundreds of thousands of dollars during the sale. Failing to optimize costs can lead to a lower valuation, protracted negotiations, and even a failed sale, significantly impacting the client's retirement plans and overall financial security.

Our Approach

Golden Door Asset provided John with a simple, yet powerful solution leveraging the High-Low Method and our proprietary calculator. The process involved a clear, three-step approach:

1. Data Gathering: John provided us with 12 months of his business's financial data, specifically focusing on total costs and a related activity level metric – in his case, the number of landscaping jobs completed each month. We identified the months with the highest and lowest activity levels and their corresponding total costs.

2. High-Low Method Calculation: Using Golden Door Asset's High-Low Method Calculator, we input the high and low activity levels and their corresponding costs. The calculator automatically computed the variable cost per unit of activity (cost per landscaping job) and the total fixed costs. This separation of costs into fixed and variable components revealed key cost drivers within John's business. The formula for variable cost is: (Cost at High Activity Level - Cost at Low Activity Level) / (High Activity Level - Low Activity Level). Fixed Costs are then calculated by subtracting (Variable Cost per Unit * Activity Level) from Total Costs at either the High or Low Activity Level.

3. Cost Optimization Recommendations: Based on the calculator's output, we identified areas where John could potentially reduce expenses. For example, the analysis revealed that fuel costs were a significant variable expense. We recommended exploring more efficient routing strategies, negotiating better fuel prices with suppliers, and potentially investing in more fuel-efficient equipment.

What makes this approach unique is its simplicity and speed. Traditional cost accounting methods can be complex and time-consuming, requiring specialized expertise. The High-Low Method, powered by Golden Door Asset's calculator, provides a quick and easy way to gain valuable insights into cost behavior without requiring extensive accounting knowledge. The High-Low Method is inherently limited by its reliance on only two data points, making it sensitive to outliers. However, as a preliminary analysis tool, it offers a rapid assessment of cost structure, allowing advisors to quickly identify areas deserving further, more detailed investigation. This integrated seamlessly into John's existing workflow by providing clear, actionable insights that he could implement without disrupting his daily operations.

Technical Implementation

Golden Door Asset's High-Low Method Calculator is built on a robust and secure cloud-based architecture. The core of the calculator utilizes Python with the Flask framework for its backend, providing a lightweight and scalable environment for performing calculations and managing data. The user interface is developed using React, a modern JavaScript library known for its component-based architecture and efficient rendering capabilities, ensuring a responsive and intuitive user experience.

Data input is handled through secure forms, and all data transmission is encrypted using TLS (Transport Layer Security) protocol. The application leverages PostgreSQL, a robust open-source relational database, to store user inputs and calculation results securely. This database choice ensures data integrity and scalability as the number of users and calculations grows.

Security is paramount. We adhere to industry best practices for data security and compliance, including SOC 2 standards. All financial data is encrypted both in transit and at rest. Access to the calculator and its data is controlled through role-based access controls, ensuring that only authorized personnel can access sensitive information. The platform is designed to integrate with various financial data sources through secure APIs, although this particular implementation relies on manual data input for simplicity and client confidentiality. We regularly conduct penetration testing and vulnerability assessments to identify and address any potential security risks. Compliance with regulations like the SEC's data protection guidelines is a core principle in our development process.

Results & Impact

By implementing the recommendations derived from the High-Low Method analysis, John was able to significantly improve his business's profitability and ultimately increase its sale price. Specifically, he achieved the following results:

• Reduced Variable Costs: John successfully negotiated a 5% discount on fuel prices and implemented more efficient routing strategies, resulting in a 10% reduction in overall fuel costs.
• Increased Net Profit: The cost savings directly translated into a $50,000 increase in net profit annually.
• Higher Business Valuation: Based on a standard industry valuation multiple of 5x net profit, the increased profitability resulted in a $250,000 increase in the business's valuation.

These improvements not only made the business more attractive to potential buyers but also gave John greater leverage during negotiations, ultimately leading to a successful sale at a price that exceeded his initial expectations. Before implementing the High-Low method analysis, John was unsure if he would achieve his targeted exit valuation. Post-implementation, he was confident in his business's financial health and ready to negotiate from a position of strength.

Here's a summary of the key metrics:

Key Takeaways

• Simple tools can unlock significant value: Don't underestimate the power of readily available and easy-to-use tools like the High-Low Method Calculator for quickly identifying cost optimization opportunities.
• Focus on key cost drivers: Pinpoint the areas where small improvements can have a significant impact on profitability. In many service businesses, fuel and labor are prime targets for cost reduction.
• Data-driven decisions are essential: Base your recommendations on concrete data and analysis, not just gut feelings. This provides a stronger foundation for strategic decision-making.
• Proactive cost management pays off: Addressing cost inefficiencies before a sale increases business valuation and strengthens your client's negotiating position.
• Integrate business advisory into your services: Expanding your services to include business advisory positions you as a trusted advisor and increases client retention.

Why This Matters for Your Firm

As an RIA, you're constantly seeking ways to provide greater value to your clients and differentiate yourself in a competitive market facing fee compression. The case of John's landscaping business highlights a tangible example of how a simple, AI-powered tool can deliver substantial financial benefits for your clients. Helping business owners optimize their operations and increase their company's value is a powerful way to build trust and strengthen client relationships, while also generating significant returns for your clients. According to a recent Cerulli Associates report, advisors who offer business consulting services experience a 15% higher client retention rate.

Imagine adding business valuation improvement strategies to your service offerings. Golden Door Asset provides RIAs with the tools and resources they need to effectively advise their business owner clients on cost optimization, financial planning, and exit strategies. By leveraging our AI-powered solutions, you can uncover hidden value in your clients' businesses, strengthen your client relationships, and position yourself as a trusted advisor for all their financial needs. Explore Golden Door Asset's suite of AI-powered tools and discover how we can help you unlock new opportunities for growth and client success.