Management consultant Peter Drucker famously said “If you can’t measure it, you can’t manage it.” Bill Billingsley is a business broker and owner of The CBB Group, Inc. After years of working with small business owners, Bill has found that owners often get caught up working in their business rather than on it. As a result, he says, most owners don’t take the time to look at the metrics that drive their business and how they affect the value of the business.
Bill has identified seven key metrics that are common to most businesses. These are the metrics that every business owner should be managing because they are also what business buyers tend to focus on. We’ll discuss each of those metrics and explain why they matter in the next two posts.
Here are the top three metrics for business owners to measure and manage.
This is the metric that most business owners looks at each month. Buyers also look at profitability as a percentage of revenue. This allows a buyer or an owner to evaluate and compare the company against its competitors in the same industry niche regardless of size.
Knowing what your gross margin is on a monthly basis and the major components that make up that margin allows business owners to remain focused on managing the costs of goods sold (or services provided). Having a gross margin that meets or exceeds industry averages is one of the top drivers for increasing value that a buyer will pay for.
Tracking revenue month over month versus the same month in prior years is essential to evaluating your current marketing and advertising strategies as well as sales force performance. Buyers will look for positive trends, seasonality and size when valuing a company.
My friend Ted Sarvata, a business consultant with Gazelles, Inc. shared an interesting article with me recently about the strategies used by savvy buyers to drive down the price on a business sale.
One tactic to watch for is an initial offer for way more money than the owner dreamed of, often based on a formula tied to company earnings, especially when it includes an exclusivity clause to prevent negotiations with other prospects. Most owners are delighted to get such a generous offer, and happily sign the exclusivity agreement. Then the fun begins.
Despite promises of a speedy sale, the due diligence phase drags on longer than expected. Meanwhile, the owner postpones key expenditures which will affect earnings and thus drag down the sale price. Then the buyer begins demanding “emergency” meetings, often at inconvenient times, disrupting the owner’s routine and increasing stress levels.
With the owner mentally checked out of the business and worn out from due diligence – and the business suffering from a cutback in critical expenditures to pump up earnings – the business unsurprisingly suffers a temporary slump. The buyer wants the company’s performance to suffer a little so they can use it to drive down the price. Beat up by the entire process, the owner will be more likely to give in to all kinds of last minute concessions affecting the final price of the business.
How do you avoid this unpleasant outcome? Start by enlisting a good business broker. If a serious prospect wants an exclusivity agreement, limit it to 30 days and require a big deposit that will be forfeited if the deal doesn’t close. And do your best to insulate yourself from the transaction. Have a trusted executive work with your broker as a go-between with the buyer, and push back against last-minute demands for meetings.
No matter how you structure a sale of your business, you will almost certainly get a better sale price if you take steps now to increase its value.
My friend Eric Williams, who is a business broker and consultant with Codiligent, LLC has several suggestions for businesses looking to boost value in the time leading up to sale.
1. Increase cash flow
Can you raise prices or eliminate expenses? For many small business owners, reducing their tax burden is second nature. But low taxable income creates a perception of low value for a buyer. In addition, eliminate owner personal expenses that are paid through the business, such as car allowances, club memberships, and the like.
2. Decrease risk perceptions
Implement a reporting system that gives you key information about company performance. Manage accounts receivable and implement credit and payment standards. Keep outstanding loans and financing needs to a minimum. Control growth at a rate that the company can finance internally and replace short-term credit with long-term, fixed-rate loans.
3. Highlight opportunities for growth and efficiency
Every buyer wants the chance to exploit undeveloped potential. Maximize the value of your business by highlighting untapped markets, new services, or technological advances that will take your business to the next level.
4. Use a professional
To ensure the greatest likelihood of a sale for your asking price, work with a qualified professional business broker to ensure that your company listing is presented in the best possible light to the widest possible audience of prospective buyers.