Private Equity Leaders: Tips to Stem Profit Leaks in the First 100 Days


Theo Curey Guest Column David 160517

Can you hear it?  That’s the clock ticking on your 100-day plan period.

Achieving a profitable portfolio exit is challenging, but private equity firms have several ways to help their emerging and established portfolio companies reduce costs, mitigate risk and increase operational efficiencies. Although it may not be apparent, many of them fall into the high-value, low-impact category, such as the human capital management areas of payroll, time and labor management, benefits administration, tax credits, and recruiting and onboarding.

Here are three challenges that can lead to significant profit leaks. Together, these three items provide an opportunity to reduce costs up to 36 percent. Tackling them up front may transform your investment beyond just a dollars-and-cents purchase and ensure that your portfolio companies are delivering the right experience to their employees.

  1. Electronic Payroll. Moving employees from a paper paycheck to electronic payroll is relatively straightforward, can deliver savings, and can be more efficient and convenient for both employers and employees.

According to the latest FDIC National Survey of Unbanked and Underbanked Households from 2013, 7.7 percent of households in the United States were unbanked in 2013. This proportion represented nearly 9.6 million households.

Each time an unbanked employee cashes his or her paycheck, they pay a fee. For instance, to cash a $1,000 check, they can pay a $5 service charge plus 1 percent fee, in this example totaling $15 for the check-cashing service. Over time, that can add up to a big hit for employees who already may be living paycheck-to-paycheck.

Issuing a pay card to employees lets them keep the money they otherwise would spend in check-cashing fees, helping to improve morale. It also enables employers to virtually eliminate shipping costs involved in disbursing checks. In addition, in the instance of an employee who is resigning or has been dismissed, that final check, which typically is due on the final day of employment, can be electronically deposited rather than delivered to the employee’s location via overnight shipping.

Electronic pay also fits with the way today’s millennial employees rely on mobile devices. Studies have shown that 86 percent of millennials aged 25 to 34 are smartphone users. It’s no surprise, then, that 94 percent of consumers under 35 are active users of online banking.

  1. Tax Credits. Are your companies leveraging all the federal, state and local tax credits that are available and to which they’re entitled? That may seem like an overly simple question, but the reality is that 3,000 tax incentive programs are available in the United States today and only 50 percent of those incentives are ever identified or used.

It’s relatively straightforward to optimize overall tax credits and economic incentives by leveraging federal WOTC, EZ/RC (Empowerment Zone and Renewal Community) tax incentives, state point-of-hire and job creation credits administration. Some examples of these types of credits are Georgia Retraining Credits, Colorado Enterprise Zone, North Carolina Job Investment Credits, and Indian Empowerment Zone, among others.

We’ve seen some significant savings in this area. For instance, a client in the transportation industry with 2,000 employees undertook an acquisition where the acquired firm did not track or file for tax credits. After implementing a screening, review and refiling process, the acquiring company saw immediate savings of $320,000 in retro credits and eventually experienced $106,000 in annualized savings.

Similarly, a manufacturing client with 500 employees saw even greater savings during a plant closure that required a reduction in jobs and subsequent reallocation of positions. That company collected $555,000 in tax credits.

Companies also can capture more tax credits when screening is embedded in the onboarding process and in instances where they have existing relationships with tax jurisdictions. Rejected applications for credits make up a significant portion of lost opportunity in this area, so it literally pays to work with a partner who has the expertise to check, refile and resubmit these applications.

Tax credit services are relatively straight forward to deploy when they’re integrated into an onboarding solution. It makes it easier to identify how many credits are available based on the physical location of company facilities, the number of company employees, and the turnover rate a company is experiencing.

  1. Unemployment Claims. Unemployment Compensation Management is a time-consuming, labor-intensive process that if not done well can be a significant source of profit loss even beyond the initial 90-day period. It’s challenging to try to reduce the cost of unemployment claims and help manage a state unemployment insurance (SUI) tax process, while also trying to comply with ever-changing state regulations!

According to the U.S. Department of Labor, 11 percent of unemployment benefits are paid in error and, of those, 19 percent are due to employers sending inaccurate or late information.  That’s a tremendous upside opportunity!

Admittedly, it’s a complex task to manage the entire unemployment insurance claims process, including confirming the correct SUI rates, managing claims administration, auditing benefits charges, overseeing a timely appeals process, and ensuring hearing representation, if necessary.

Despite that, it’s possible to see as much as a 4 percent reduction in unemployment insurance rates within 18 months if this process is managed properly.

That clock may be ticking on your 100-day plan period, but attaining your financial objectives for portfolio purchases can be achieved. Focusing on a few of these human capital management aspects can provide a rapid return on investment. It just takes planning, a key eye to sweating the details, and the right kind of expertise to ensure your investments pay dividends and your portfolio companies continue to grow during their transition.

Theo Curey is a senior vice president of strategy and business development for ADP Global Enterprise Solutions. Previously, he was vice president of corporate strategy for ADP.

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