Time to sell? Here are the top 10 drivers of value in a business…
If you truly want to sell your business, it pays to know what buyers look for, before you even start your business. Buyers don’t just look at today’s results. They want to know your potential results, too. You need to think like a business buyer. If you were buying, what would you look for in a business? Write that down and use it as a guide for how you’ll build your business.
“If you fell ill and couldn’t work, how long could your business survive?”
If you want to build a business others want to buy, you need to get educated now about what a buyer looks for when assessing a potential acquisition. Getting this right now will enable you to sell the business for a much higher fee later on. Here are the top growth metrics that give buyers a holistic picture of how successful you are now, and how likely you are to be successful in the future. There are measurable factors and non-measurable factors.
The measurable factors are:
1. Net profit
Net profit is the money you get to keep. This number comes last on the profit-and-loss statement, which is why it’s called ‘the bottom line’. The net profit can be paid out to owners or reinvested in the business. It’s what makes you successful, and it’s what buyers are seeking. All they care about is: Will this investment make them money?
Net profit = Gross profit (or total income) – all expenses
2. Asset turnover
This metric measures the ratio between the revenue you make and the costs of holding the asset that generates that revenue. In simple terms, it means how much revenue you earn based on the assets you have. We want this figure to be high, as it means the asset is being used efficiently.
Asset turnover = (Total revenue / total assets) x 100
3. Strike rate
The strike rate is calculated by dividing the total number of sales by the total number of sales opportunities.
Strike Rate = (Enquiries or leads/number of sales) x 100
4. Annual contract value
This metric tells you about the revenue an investment has generated over 12 months with regard to the capital invested in it. It’s also known as return on investment (ROI).
Annual contract revenue = [(present total value of investment – initial value of investment) / initial value of investment] x 100
5. Monthly recurring revenue/subscriptions
This metric tells us about the earnings that a company generates every month and identifies the likely income stream that it will generate in the future.
Monthly recurring = average monthly revenue per customer x total number of accounts
There is also a range of non-measurable factors that buyers take into account:
6. Intellectual Property
Do you own your own IP, is it valuable, and can you demonstrate that you own it? When I sold my business, the new owners wanted proof that I owned the rights to my logo. I had it done over 15 years earlier so I needed to track down the designer from the past and get her to sign a document. Fortunately, she agreed but if she didn’t, I would have been in a pickle. Ensure you have ownership of everything and get it all in writing.
7. Market attractiveness and growth
Are you in a market that is growing or declining? This may sound flippant but if you were in the business of selling cigarettes, or gambling or diesel cars, would you say that the future held more or less regulation for you? More or less social pressure? I’m not saying you can’t sell these businesses, but for categories that many consider to be ‘on the nose’ just know that you’ll probably have fewer interested potential buyers.
8. Customer concentration
Do you have more than one important customer? How much of your revenue comes from your top customer? If they were to go away, could you sustain your revenue? One of my mates was stoked when his fabrication business landed a big contract with a major grocery chain. It went well for a year or two, but then they put the screws on, reduced his margins to virtually zero and drove him to the wall. He’d given away all his smaller clients because he was tied up dealing with the big chain. When that big chain pulled the pin on him, he was left with nothing.
9. Owner dependency
If you fell ill and couldn’t work, how long could your business survive? A month? A year? A decade? For most business owners, the sad reality is their company would shrivel up and die within the week. Why? Because they are the business. Without them, nothing happens. If they stop, so does the business. They are what’s known as ‘technicians’. The term is not a pejorative, but it’s not a compliment either, especially if you want to build a business others want to buy.
10. Good governance
Are your records up to date? When I sold the business, they wanted to see all our employee contracts, equipment leases, client agreements, real-estate leasing documents and bank statements for the last three years. In total, I had to supply over 300 documents to them.
Fortunately, I had everything organised, as I’d been preparing for this moment and knew what they’d want. The fact I could lay my hands on all the data quickly and get it to them quickly proved to them I was organised, disciplined and a serious player.
It’s important to remember that business buyers won’t assess your business based on just one or two numbers. They’ll use a large range of metrics to get a holistic picture of the health of your company. This is why it’s important you understand the breadth and depth of all the metrics that the buyers will be examining. You may not be able to ‘tick the box’ against all these metrics but the more you can get right, the more money you’ll get for your business.
This article first appeared in issue 42 of the Inside Small Business quarterly magazine
