As a business owner, it is your job to create value within your business. And in the early stages of exit planning, you need to understand the relationship between value drivers, key performance indicators (KPIs), and your ability to fetch the highest possible selling price for your business.
Value drivers are the broad-level characteristics of your business that buyers are going to be interested in because they either reduce the risk of owning your business or enhance the prospect of significant future business growth. KPIs are tied to strategic objectives and measure the performance against the goal. So the KPIs that will be most valuable to you will be industry-driven and company-specific. Here’s a look at some of the top value drivers and some potentially helpful KPIs.
Next-level management is arguably the most significant value driver of all. According to the Business Enterprise Institute (BEI), it’s “the mother of all value drivers.” The management team you build will be the team overseeing the growth of the business leading up to the sale. These key employees hold significant responsibility for improving cash flow, building customer and employee relationships, and maintaining day-to-day operations. And with proper training and key employee incentive planning, the current team in place could be the trusted team to carry you through the transition of ownership.
In addition to training metrics and key employee incentive surveys, potentially helpful KPIs may include:
- Employee Turnover – (Total Number of Separated Employees for a Specific Period / the Average Number of Employees Working Within that Period) x 100
- Employee Acquisition Cost – (Total Internal Costs to Hire Employee + Total External Costs to Hire Employee) / New Hire’s Total Annual Compensation for 1st Year)
- Employee Satisfaction – (Positive Responses / Total Number Responses) x 100
Sustainable Revenue & Scalability
Promoting sustainable revenue and scalability can help you increase the value of your business. Business owners need to ensure their pricing margins are resistant to commoditization. You can start by taking a look at whether you could improve profit margins by increasing revenue or whether customer concentration puts sustainable revenue at risk. And sound financial controls and formally documented policies and procedures are effective ways to foster scalability.
In addition to your financial statement data, potentially helpful KPIs may include:
- Customer Concentration Risk = Revenue from Top Customer for Last 12 Months / Total Gross Revenue for Last 12 Months
- Net Sales = Gross Sales – Sales Returns
- Gross Profit = Net Sales – Cost of Goods Sold
- Sales to Equity Ratio = Net Sales / Shareholders’ Equity
- Net Profit Margin = (Net Profit / Total Revenue) x 100
A Competitive Growth Strategy
When you have a competitive advantage, you offer a product or service that is better or cheaper than your competitors. So you need to understand why your customers choose you over the competition so that you can publicize and capitalize on what sets you apart.
Developing a growth strategy helps attract potential buyers. A growth strategy could consist of the development of new product lines or services, augmenting existing ones, expanding into new territories, or increasing manufacturing capabilities. It could also include M&A or smaller scale growth options, such as purchasing customer lists, inventory, or equipment or acquiring experienced staff from competitors.
In addition to market studies and benchmarking data on your area’s competition, potentially helpful KPIs may include:
- Customer Retention = ((Number of Customers at the end of Period – Number of New Customers During the Period) / Number of Customers when Period Began) x 100
- Customer Satisfaction Score = (Positive Responses / Total Number of Responses) x 100
Strong Cash Flow & Expense Management
Maximizing cash flow and minimizing costs are effective ways to increase your company’s value. Start by reviewing accounts receivable and accounts payable for opportunities to improve cash flow. Look at other existing operations like job costing or inventory management for efficiency and productivity. Review your vendor and supplier contracts for opportunities to save. And consider doing a cost/benefit analysis to weigh the projected time savings, revenue increases, and boost in business value you may experience by utilizing automation and efficiency-promoting software.
In addition to data you collect on inventory and from cost/benefit analyses, potentially helpful KPIs may include:
- Operating Cash Flow = Net Income + Non-Cash Expenses – Change in Working Capital
Current Ratio = Current Assets / Current Liabilities
- Quick Ratio = (Cash + Accounts Receivable) / Current Liabilities
- Debt-to-Equity Ratio = Total Liabilities / Shareholders’ Equity
- Days Expenses in Accounts Payable = (Accounts Payable / Annualized Revenue) x 365
- Days Revenue in Accounts Receivable = (Accounts Receivable / Annualized Revenue) x 365
Contact Altus Exit Strategies
Exiting your business requires long-term, comprehensive planning. But by starting to plan early, you can maximize your company’s transferable value and ensure the company’s ongoing financial health.
The professionals at Altus Exit Strategies, a wholly-owned subsidiary of Albin, Randall & Bennett, are industry leaders here to help your business through the Exit Planning process and other succession planning needs.
As a certified exit planner, I understand the tax benefits and potential tax consequences around timing an exit and how to pull together the right team, resources, and strategy to increase the value of your business and set you up for a successful exit. Contact me today for more information.
by David Jean, CPA, CCIFP, CExP
David Jean is the Director of Altus Exit Strategies and a Principal at Albin, Randall & Bennett, where he is also the Succession Planning Services Practice Leader. David works with business owners who want to improve their business’s value before they sell through the Seven-Step Exit Planning Preparation™ process. He has worked with companies from $5 million to $50 million in revenue across a range of industries.