Do you know it’s possible to increase company value and profitability by improving worker safety? I recently had lunch with Colin Baird, a colleague of mine that helps companies reduce their workers comp costs. In case you’re wondering, he is not an insurance salesman! He is a fee-based consultant who focuses on companies with $250K or more of workers comp, and a higher than average “experience modifier”. In California, an experience modifier is a rating given to eligible companies by the Workers Compensation Insurance Rating Bureau (WCIRB) – it compares companies based on their history of payroll and claims. How does this affect the bottom line?
Colin’s short video above is insightful! Companies with lower experience modifiers pay less in workers comp premiums, and companies with higher experience modifiers pay more. Paying less in workers comp directly improves earnings before interest taxes depreciation and amortization (EBITDA) – aka, the bottom line. In addition to the short-term increase in profitability, since companies are sold based on multiples of EBITDA, any improvement also increases the company valuation when it comes time to sell. Since it takes time to reduce a company’s experience modifier, this should be considered several years before an anticipated sale.
This is also an example of effective tax management, which includes transforming certain types of income into gains, certain types of expenditures into losses, certain types of taxable income into nontaxable income, etc. In general, any investment toward increasing worker safety will be treated as an expense for the current year, which reduces income, and thus the amount of tax paid in the short term.
In the long term, as discussed above, the growth in profitability (EBITDA) gained from lowering the worker’s comp costs will result in an increase in the company valuation. From a tax management perspective this is significant because this increase in value is nontaxable until the time of sale, merger, etc. When the business eventually changes hands, and the increased value is recognized, it will usually be counted as a long-term capital gain which is normally taxed at a much lower rate. By increasing worker safety and lowering workers comp costs, one is not only able to sell a business for more, but pay less in taxes simultaneously! There are many situations in which a similar strategy could be used, such as spending on advertising to increase goodwill.
To learn more about effective tax management, contact us today!
For more information on how to lower worker’s comp, we recommend visiting Colin’s blog: http://privateequityriskmanagers.blogspot.com