The simple ratio divides an up-front cost by a saving that arrives over a year; the phased cash payback is the one lenders and buyers check.
Restructuring payback is the one-off cost to achieve divided by the net run-rate saving, then corrected for how slowly the saving actually arrives. On an illustrative programme costing 4.75 million to deliver 5.40 million a year, the simple payback is 10.6 months, but with costs paid up front and savings ramping over four quarters the cash pays back in 18.1 months. At a 9.0x exit multiple the same saving is worth 48.6 million of enterprise value, 10.2 times its cost.
Worked in full in The Private Equity Operating Partner by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Every operating partner presents payback to an investment committee, and the simple version is the one that gets presented. It divides a cost the company will pay in the first two quarters by a saving it will not fully see until the fifth. Lenders, auditors and the eventual buyer all look at the phased number, so it is worth computing it first.
A portfolio company with 200.0 million of revenue and 24.0 million of EBITDA, a 12.0 per cent margin, closes one site and removes 60 roles. All figures illustrative, in millions.
| Line | Basis | Amount |
|---|---|---|
| Staff saving | 60 roles × 0.075 fully loaded | 4.50 |
| Site running costs removed | Rent, rates, utilities | 1.50 |
| Dis-synergy | Extra freight from the remaining site | -0.60 |
| Net run-rate saving | 5.40 | |
| Severance | Six months of loaded cost per role | 2.25 |
| Lease exit | Surrender premium | 1.20 |
| Advisers | Consultants and legal | 0.80 |
| Double running | Both sites open during transfer | 0.50 |
| Cost to achieve | 4.75 |
Costs fall 70 per cent in the first quarter and 30 per cent in the second. Savings reach 25, 50 and 75 per cent of run-rate in quarters two to four, and the full run-rate from quarter five. Tax is ignored to keep the arithmetic visible; in practice severance is usually deductible and the after-tax payback is similar.
Simple payback (months) = cost to achieve ÷ net run-rate saving × 12
Phased payback = the month in which cumulative (saving achieved − cost paid) turns positive
Simple: 4.75 ÷ 5.40 × 12 = 10.6 months. For the phased version, lay the quarters across columns, with the ramp in row 3, run-rate in B1 and costs in row 5: savings =$B$1*C3/4, cumulative =B7+C4-C5, and interpolate inside the quarter where the cumulative crosses zero: =(quarter-1+(-previous cum)/(saving-cost))*3.
| Quarter | Ramp | Saving | Cost | Cumulative |
|---|---|---|---|---|
| 1 | 0% | 0.000 | 3.325 | -3.325 |
| 2 | 25% | 0.338 | 1.425 | -4.412 |
| 3 | 50% | 0.675 | 0.000 | -3.737 |
| 4 | 75% | 1.013 | 0.000 | -2.725 |
| 5 | 100% | 1.350 | 0.000 | -1.375 |
| 6 | 100% | 1.350 | 0.000 | -0.025 |
| 7 | 100% | 1.350 | 0.000 | 1.325 |
The cumulative bottoms at minus 4.412 million at the end of quarter two, which is the cash the company must fund before it sees any benefit. It is still minus 0.025 at the end of quarter six and crosses zero a few days into quarter seven: 18.1 months, or 1.50 years.
In year one the programme saves 2.025 million and costs 4.75 million, a net cash drag of 2.725 million in the year the investment committee expected it to pay back. By the end of year three it is 8.075 million cumulatively positive. EBITDA rises from 24.0 to 29.4 million at full run-rate, a 22.5 per cent uplift and a margin of 14.7 per cent against 12.0. At an exit multiple of 9.0x, the 5.40 million of run-rate is worth 48.6 million of enterprise value, provided it is fully in the last twelve months' numbers at exit. A saving still ramping when the company is sold is credited by a buyer only in part, as worked in how to calculate run-rate EBITDA.
| Scenario | Run-rate | Cost | Simple, months | Phased, months | Exit value |
|---|---|---|---|---|---|
| Base case | 5.40 | 4.75 | 10.6 | 18.1 | 48.6 |
| Ramp two quarters late | 5.40 | 4.75 | 10.6 | 24.1 | 48.6 |
| Only 70 per cent of savings delivered | 3.78 | 4.75 | 15.1 | 22.6 | 34.0 |
| Twelve months of severance | 5.40 | 7.00 | 15.6 | 23.1 | 48.6 |
| Dis-synergy ignored (the deck view) | 6.00 | 4.75 | 9.5 | 17.0 | 54.0 |
A two-quarter delay in the ramp does not move the simple payback at all, and adds six months to the real one. That is why the simple ratio is a poor monitoring tool: it cannot see the most common failure. Severance terms matter almost as much, and in many European jurisdictions twelve months is closer to the norm than six; set it from local employment law, not from a template. Delivering 70 per cent of the savings, a frequent outcome, pushes payback to 22.6 months and removes 14.6 million of exit value.
The mistake is to present gross savings against partial costs. The deck view leaves out the 0.60 million of dis-synergy and shows 9.5 months; adding the double running, adviser fees and the full severance that some decks also omit makes the gap to the 18.1-month phased figure larger still. Count the fully loaded cost per role, including employer taxes and benefits, as in the fully loaded cost of an employee, and count the severance on the same basis.
Present three numbers together: the simple payback, the phased cash payback and the exit value of the net run-rate. The first is what people remember, the second is what the company must fund, and the third is why the programme is worth doing. The bridge that shows how much of the value created came from operating work like this is built in the free workbook for this case.
Inside a private equity hold, the saving must reach full run-rate well before exit, so a phased cash payback of under two years is a common internal bar, though it is a judgement rather than a rule. In the illustrative case the programme pays back in 18.1 months in cash and leaves three full years of run-rate before a typical exit.
Everything the saving would not happen without: severance on a fully loaded basis, lease exit or dilapidation costs, advisers, double running during transfer, and any system or retraining spend. In the illustrative programme they add up to 4.75 million, of which severance is 2.25 million at six months per role; at twelve months it would be 7.00 million in total.
Yes. Costs created by the change, such as extra freight from consolidating sites, reduce the run-rate the business will actually report. Leaving out 0.60 million of dis-synergy in the illustrative case raises the saving from 5.40 to 6.00 million, shortens the simple payback to 9.5 months and overstates exit value by 5.4 million at 9.0x.
This article is one calculation from The Private Equity Operating Partner. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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