Get the Metrics Tracked Well in Advance of Selling
For many business owners, the pandemic was the final straw that accelerated their timeline to sell and to do something else or retire. If you own a business and the timeline to sell is several years out or more, this blog is written to help you.
KPIs: Key Performance Indicators. They are not just for big businesses.
Many business owners, including entrepreneurs and owners of family run businesses, think metrics and KPIs are reserved for corporations, the big guys who announce earnings and have earnings reports published. That is not the case. To maximize the value of your business when you decide it is time to sell, you need to know the key performance indicators of your business. If you do, you set yourself apart from other businesses and are likely to interest more buyers, complete the transaction faster and your business may sell for a higher multiple.
So, what key performance indicators should you track and report on?
Admittedly, key performance metrics can vary widely by industry so we recommend you research the key metrics that a business in your industry should be measuring and reporting. Seasonality is an important factor in a business and tracking metrics monthly is recommended so you have data to support the seasonality of your business.
While there are variations by industry, there are common business metrics that a potential buyer is going to be very interested in. If you have this information readily available, you and your staff will avoid the task of trying to go back and create such metrics over time as well as avoid possibly losing out on an interested buyer as they have other businesses who can readily provide and explain their business performance metrics.
Key Performance Indicators – Examples:
Below are some key performance metrics to help you start developing reports out of your financial reporting system or at a minimum develop an Excel spreadsheet to start capturing monthly data and trends. A summer intern could help you get this in place and it would be a great experience for an accounting, finance or economics student. Keep in mind that having a few of these metrics tracked will still set you apart from another company that doesn’t track any performance metrics.
- Segments: number of suspects and leads by top segments; data by referral sources and key markets or geographies.
- Channel data: where are leads coming from?
- Awareness metrics: social media impressions by channel; website visits including via search and direct visits; average time on website.
Sales: KPIs for your pipeline and reporting its health.
- Pipeline: track number of prospects and quotes by sales stage monthly.
- Length of sale: track duration from initial inquiry to sale to be able to report average length of a sale.
- Average sales in $: track and report sales by dollars to report average sales in dollars by month.
- Average sales in units: track and report in terms of units if your business is product driven.
- Sales by sales person: track and report productivity by sales people.
- Sales by clients/customers: $ and % for insight into exposure and risks of reliance on a few clients/customers.
Employees: given the shortage of labor, a prospective buyer is very interested in understanding the quality of your employees. It is important to be able to easily report the quality of your team. In some cases, we are seeing this as a strategy to acquire businesses specifically to acquire the labor force.
- Employee Retention: dates of hire and years of service are important metrics; especially for top performers and for skills and expertise essential to your business.
- Average years of service
- Age of employees: potential buyers want to be able to easily assess the risk of top employees nearing retirement age.
Operational metrics: we suggest you meet with your management team and identify the top operational metrics that are most relevant to your business.
- Inventory value in $
- Inventory turnover: aging of inventory
- Inventory risks by top products: in this time of supply chain shortages, reporting on the level of inventory of inputs or materials is important to show risks of supply chain conditions to your business.
Productivity: Similar to operations, how can you track and report on key productivity indicators of your business?
- # units produced
- # units in process
- Labor metrics: including number of hours to complete a job, such as for a manufacturer.
Other Professionals to Help You
There are many available resources to help guide you to identify the key performance indicators for your business. We recommend starting with a list of everything that comes to mind as a laundry list of the questions you regularly ask to ascertain how your business is performing. Then consider asking your accountant, advisor or board of directors. As business brokers, we are here to help you well in advance of selling to prepare your business for sale. This includes guiding you as to the metrics that a strategic buyer or individual buyer will be interested in, specific to your business and industry.
As Peter Drucker said, “If you can’t measure it, you can’t improve it.” With KPIs in place well before you intend to sell, you are giving yourself time to focus on the areas of your business where you can improve the metrics. You are in charge of your destiny and better positioned to drive value.
As you look ahead, contact us to discuss driving value in your business. Now is the time to plan ahead and be ready.
If you did not read our prior blog, “How to Drive Business Value: What Strategic Investors Are Looking For”, take a look. We’re here to help you maximize the value of all your hard work.