When entrepreneurs decide to sell their businesses, they are often surprised by the volume of information requests from potential buyers. Instead of playing defense with these requests when it is time to sell, I encourage you to embrace data and measure your company’s performance now. Playing offense will allow you to be better prepared for an eventual exit and allow you to make better decisions along the way, potentially yielding a higher business valuation.
Every organization has different things that can be and should be measured. If this is a new practice for you, start by keeping it simple. Measure no more than a handful of items that you believe drive your organization’s success, focused on the sales funnel, operations of the business and financial performance.
Pipeline-oriented metrics are an important leading indicator of future revenue. Monthly tracking could include the number of quotes completed and quote conversion into won business. Pipeline trends can signal when demand is slowing or when you are experiencing a demand surge, which can help your team anticipate a hiring need.
Businesses rely on a wide variety of operational metrics. Some of my favorites that are more universal include utilization metrics, delivery against promise dates and safety-related metrics. Keeping staff safe is a priority in both manufacturing and service businesses. By measuring “near-misses,” it protects your most important asset: your people. Delivery against promise dates is a simple but effective measure of customer satisfaction. If you are regularly disappointing customers with late deliveries, they may seek alternative suppliers. Late performance often serves as a “canary in coal mine” for operational challenges that haven’t surfaced yet. It can signal an understaffed department that is creating a bottleneck, holding up downstream operations. It can also signal waste. Sometimes, it is as simple as an overly optimistic salesperson who quoted too short of a lead time. Whatever the reason, late deliveries can impact customer relationships across all businesses and are worthy of being measured.
A future buyer will certainly dig into the financial performance of your business as well. If you are looking to measure something other than the cash in your company’s bank account at month’s end, I would initially focus on two financial metrics: revenue growth and margin percentages (either gross or net). Growth will be important to a future buyer. It is important not to get too comfortable and allow your business to stagnate. Measuring growth compared to the same month or quarter last year is a good reminder of this objective. A margin-related metric will help ensure you are generating sufficient profit from your revenue. While measuring profit is critical, this exercise is futile if you don’t take time to dig in further after a high or low margin month. A high margin month is to be celebrated but can also be symptomatic of a missing invoice (cost). A low margin month may reflect operational inefficiencies or a project that was quoted at too low of a margin.
Measuring your business today will help you see problems before they impact your financials and help you to score big when it is time to sell your business. Having the data readily available in a sale will also give a future buyer confidence in your operations, which may drive a higher purchase price multiple. ●
Corrie Menary is a Partner at Kirtland Capital Partners
