To really empower themselves in building value into their business, business owners need to develop systems to periodically check in on the market value of their company. With all of your other responsibilities, this can seem like a lot to take on, but it doesn’t have to be. The process of building value into your business is a gradual one, and every step you take toward it moves the needle for you.
We recommend you start by getting familiar with and tracking the KPI’s that seem most relevant to your operation. Over time, as you develop routines and become proficient, you can add in more KPI’s to enrich the picture. Remember, everything you can do goes a long way, and now is always the best time to start.
Assessing your business from the investor’s perspective
There are a great many KPI’s that investors and buyers use to assess a business. Familiarizing yourself with these KPI’s, and monitoring them, does two things:
- You can assess the current value of your business as an investor might see it, and set goals for growth accordingly
- You gain insight into areas for improvement that benefit you and your operation in the immediate term.
Below is a list of KPI’s that we know investors consider to be important. Note that this list is not necessarily exhaustive, but is meant to give you an understanding of how buyers will assess your company.
These indicators are meant to tell the story of the quality your company delivers to its customer base. Here a few you can focus on:
- Support/service ticket calls-per-month
- Ratio: support/service ticket calls-per-customer
- Return rates
- Bug fixes (for tech)
- Release schedules for maintenance/new product/services
- Customer feedback
Using these, you (and potential buyers of your company) can get quantifiable data to understand how quality is impacting your operating costs and how that can be factored into your vision for the company.
These indicators give insight into operating costs, efficiency and potential.
- Production capacity, and utilization of said capacity
- Operating efficiency IE machine downtime
- Rate of on time delivery: indicates how well coordinated your production is, indicates reliability and efficiency Production costs IE labor, materials, etc.
- Delivery costs
- Retention costs
Metrics that quantify these aspects will help you and potential buyers understand what your strengths and weaknesses are regarding the cost effectiveness of your production. That means you’ll know where you can reduce waste and improve efficiency.
Naturally, the cost-effectiveness of your sales funnel is going to be a big deal to investors.
- Cost per lead
- Cost per sale
- Ratio: cost per sale to sales overall
Metrics like these will help buyers and company owners alike to better understand how the sales funnel fits into the overall picture of the profitability of the business. What is the potential for leads and conversions? How cost effective could implementing different strategies be
Simply put, the profitability and potential profitability of your business.
- Revenue by FTE (full-time equivalent) aka the ROI that each employee offers the business
- Revenue by customer. Are all your eggs in one basket? Having a large portion of your revenue relying on one customer who might abruptly switch makes your company look like a riskier investment
- Total number of customers
- Gross margin and net margin
- Number of new customers. Indicates growth.
- Returning customers. Indicates strong customer relationships and predictable revenue
- Distribution of revenue across different aspects: products or services, demographics. Indicates diversity and potential
These indicators will help you and potential buyers to identify and quantify how predictable and diverse your revenue is. Ultimately, buyers want to pick up a company that will continue to produce regardless of the changes that new ownership might bring. For you, as the current owner, the benefit is being able to develop your business into one that is less reliant on you or any single moving part.
Subscription based revenue strikes potential buyers as being highly predictable. This simplifies the financial side of your operation. Additionally, subscription selling offers new ways to deliver value to the customer. Here are a few things investors want to know about your subscription based sales model(s):
- Average active user minutes per month
- ARR as broken down into subscription plan, customer longevity, customer health score,distribution across customers. Indicates diversity, indicates how much of your ARR can be attributed to things like customer loyalty, and the terms of certain arrangements.
Finally, the cost-of and value provided by your physical assets is going to be a factor.
- The value of company property, the expense of mortgage payments, and the balance remaining on your loan
- The terms of your lease
- The value of equipment and liquid assets
As we’ve said before and will say again, you’ve done yourself a huge favor by getting started with valuation now. Proficiency in this arena will give you credibility when communicating with investors, and help you pinpoint the best asking price when it does come time to sell. Understanding how potential buyers will look at it will change the way you think about your business.
We want to see you make the most out of your company. There are two limitations that we’ve seen business owners commonly up against:
- They’re very busy just operating the business
- They’re so invested in their vision that they don’t see their company as investors do
If you find yourself without the time or the perspective to really dial in on valuation and strategies for appreciation, bringing in outside help is a move that can pay big dividends. This doesn’t have to be expensive.
You now have decades of experience in business and legal consultation at your disposal. The appreciation and sale of your businesses is our business, and we seek to bring it to businesses of all types and scales. We can arrange flexible terms and will consider equity in the sale of your business over front-loaded payments. To discuss this with us, click here, and fill out a quick 5-step contact form.