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.
AVOIDING PREMATURE DISCLOSURE OF A PENDING SALE
When selling a business, one thing most sellers don’t want is premature disclosure of the pending sale. Customers may drift away to competing businesses, key employees may look for other jobs because they think the new owner will clean house, and suppliers may tighten up credit terms to avoid getting stuck with unpaid bills.
Any one of those issues can reduce profitability for a business – and since many valuation formulas are based on multiples of net income, even a relatively small dip in revenue can have significant impact on the ultimate sale price. Having all of these issues occur at once can be fatal.
NONDISCLOSURE AGREEMENT (NDA)
For these reasons, most savvy sellers will require prospective buyers to sign a Nondisclosure Agreement (NDA). An NDA, also known as a Confidentiality Agreement, is a contract between the prospective buyer and the seller that prevents disclosure of information about a pending sale or the business itself.
Buyers naturally need to engage in due diligence and get information about the business to help them decide whether to buy it, and if so, for what price. Typically that means reviewing tax returns, financial statements, leases and other confidential information about the business such as marketing and sales strategies, the identity of key customers and suppliers and other sensitive business information.
SIGNING THE NDA
In order to access this information, buyers must sign an NDA. The NDA requires that the buyer treat the information received as confidential. Usually the buyer is allowed to share the information with its attorney, accountant and other professionals involved in the transaction but not with anyone else. In many cases, the NDA requires the return of confidential information documents within a very short period of time if the buyer chooses not to go forward with the sale.
Using an NDA not only can help sellers preserve confidentiality about a possible sale, but it also is a wise precaution to prevent trade secrets and other potentially useful information from falling into a competitor’s hands.