How are You Doing? Competitive Business Benchmarking

How are You Doing? Competitive Business Benchmarking

Previously, we discussed business benchmarking using internal measurements, tracking and analyzing 5-7 key indicators of your business’ growth and success.

Now, let’s focus on the second benchmarking measure – comparing yourself against your peers based on industry data.

The second form of benchmarking is to compare your business to industry data.

Industry data is available from many sources. The most available data is financial data from several companies that collect and sell the data to banks, accountants, and other advisors. Also, many industry trade associations collect and track much more detailed information. While not perfect, this data can provide a meaningful comparison for analysis on how you are doing. Often this data is sorted and available based on performance. For instance, companies can be sorted in the 25th, 50th, or 75th percentile of financial performance.

Since only half of all companies with revenues of $10 million to $50 million will sell, you want to compare yourself to companies in the 75th percentile or better. These are the companies that are performing well and are creating real value.

Your results will not mirror the industry data, but the data will be useful for comparison purposes.

For example, a drywall contractor may see that their cost of goods sold is 73% while the industry norm for companies in the 75th percentile is 70%. Yet overhead for the drywall contractor is 20% producing a 7% profit. The industry norm at the 75th percentile is 25% overhead and a 5% profit. In this case, profit is above industry norm.

Perhaps this contractor spends a little more on direct labor, but because they have better people they are able to perform with less oversight. If this is true, there is no reason to make a change based on the data. If not, perhaps the direct costs can be brought down. Perhaps better purchasing could reduce costs. Perhaps labor can be applied more efficiently. In all cases, do not use this data and analysis as a reason to rest on your laurels but as a process in order to find ways to improve.

Internal Benchmarking along with Competitive Benchmarking will help you adjust course to be as profitable as possible and identify areas for growth.

 


 

Clients choose Harvest Business Advisors for our sage advice on profitably growing their business, accurate business valuations, and when the time is right, a consistent ability to deliver a high price as part of a smooth exit transaction.
Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 877-838-4966 to discuss selling your business, ordering a business valuation or buying a business.

What assets are you selling – when you sell your business?

As business brokers know, most small businesses are sold on the condition that the Seller keeps the cash, accounts receivable, and the accounts payable as of the date of sale.  As businesses get larger, or if the business has high accounts receivable, then a “deal balance sheet” may be negotiated.  In almost all cases the Buyer receives the business name, lease, inventories, good will, customer list, telephone number, yellow page or other advertising, employees, industry knowledge, and so on.  The Seller also pays off all debts.  This is similar to the Seller paying off the mortgage from the sales proceeds when you sell your home.

Connect with Harvest Business Advisors today – email info@harvestbusinessadvisors.com or call 443.334.8000

Generally the Buyer needs to receive the assets necessary to create the cash flow he is purchasing.

Machine Shop Owner Loves His Lathes

We worked with  a machine shop owner who had eight industrial lathes.  He had not used more than two in the past five years but he just loved his lathes!  He really only needed to sell two with the business.  We suggested that he remove the other six lathes from the shop floor and the equipment list prior to showing the business to prospects.  Whatever he was able to earn from the sale of the lathes was money he would not have earned conveying all eight to the new owner.

As businesses become larger these assumptions are subject to negotiation.  For larger businesses it makes sense to define the business that will be sold by negotiating a ‘deal balance sheet.’  This shows the approximate value of all assets and liabilities (if any) being sold.  For instance, a “deal balance sheet” may specify that current assets are to be $200,000 above current liabilities in order to provide working capital for the buyer.

 

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors
Business Brokers, Business Valuations, Business Transactions
Mid-Atlantic and Nationally
609-664-7955
www.harvestbusiness.com

A Business Broker’s Tip to Improving Your Business Value – Determine Your Most Profitable Customers and Fire the Rest

Yes, I am a business broker, I also have 10 years experience owning a home building company and am an JD, CPA, and CVA.   This is good stuff when followed.

Every contracting business and engineering firm has profitable and unprofitable customers.  If you have not analyzed this, you should.  In most cases owners are shocked when they perform this analysis.  Take each customer (or product type or market group) and deduct the cost of goods sold to them.  Fairly allocate overhead costs either by a simple blanket allocation of all overhead or by breaking out different overhead costs as they apply to different customers.

Considering Selling Your Business? Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.

New Construction Blues

Take a look at this small mechanical contractor’s books.  Simplified, they look like this: 

Sales Revenue of $5,000,000 broken down as:

New construction        $2,000,000
Residential service     $500,000
Commercial service    $2,500,000

Cost of Goods Sold $2,675,000 broken down as:

New construction        $1,500,000
Residential service     $175,000
Commercial service     $1,000,000

Overhead totaled $2,000,000, broken up as:

Indirect labor (including owner’s salary)       $750,000
Other overhead                                         $1,250,000
Total profit                                                $325,000

The simplest analysis to determine profitability is:

Customer Profitability Chart

Sales –            COGS –          Allocated Overhead = Profit

New Construction       $2,000,000      1,500,000        $800,000                 -$300,000
Residential Service     $500,000          175,000            200,000                   125,000
Commercial Service   $2,500,000      1,000,000        $1,000,000                  500,000

The overhead was allocated based on the percentage of sales of the customer type to total sales. 

The next level of analysis might be to allocate indirect labor by the amount of time spent on each customer type.  Track or, if you must, estimate payroll allocation to the hours spent direct marketing, supervising, meeting, getting paid etc.  With new construction the profitability might decrease more. 

As you can clearly see, this business is performing new construction services at a loss.  Unless there is a really strong business reason, this business owner should either raise prices for new construction or focus on selling more residential and commercial service.  Sales for the sake of sales is ego, (expensive ego) not a valid business reason.

You can make the argument that $100,000 of overhead is paid from new construction projects but that can be equaled with additional sales of under $200,000 of commercial services.  Transition to the higher paying customers.  The most profitable companies consistently perform this type of analysis and focus on their most profitable customers.  Over time this is how exceptional profits are generated.

Greg’s Tip:  Improving sustainable cash flow and profitability is the most effective way to increase the value of your business.  This is by far the most important factor in determining business value.  Sell when profits will be improving right through settlement.

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors
Business Brokers, Business Valuations, Business Transactions
609-664-7955
gcaruso@harvestbusiness.com
www.harvestbusiness.com

Ways to Generate Qualified Prospects – Business Brokers, Intermediaries, Investment Bankers, M&A Specialists

Let’s talk about ways to generate prospects on your own , or by business brokers and business intermediaries as described below.

Business Brokerage.  According to industry statistics, only 30% of Buyers purchase the type of business they first start calling on, and this number increases with smaller businesses.  This is one way brokers add value.  Brokers can take callers who decide they are not interested in the first business and move them to another businesses they have for sale.  A broker with many different businesses can move a prospect through many opportunities.  This is particularly important if your business is unlikely to generate phone calls directly either because of the business type or because of business conditions.

Intermediaries, Investment Bankers, and Merger and Acquisition Specialists are all brokers and advisors with different networks and abilities.  As the transactions get larger the advisory aspect of a broker relationship increases in value to the Seller.  It is likely that good advice will increase the final value by at least 15% above the original starting value.  It may not be worth paying a consulting fee on a $100,000 sale but for a ten million dollar business, that is a whole different ball game!

In general, “business brokers work with businesses up to about $5,000,000 in value; intermediaries handle businesses worth between $2,500,000 to $10,000,000; and investment bankers and merger and acquisition specialists manage the $5,000,000 to $50,000,000 on up crowd.  Still, there is a lot of overlap between the groups at the edges.                         

Co-brokerage.  Many brokers co-broker with other brokers they trust.  Since confidentiality is so important a good broker will not send your confidential file to just anyone.  The prospect must be qualified first.  A good broker is always concerned with respecting and protecting the Seller’s confidentiality.  A few brokers will sell an unlisted business but, historically, many of these brokers have not been paid, so many refuse to sell an unlisted business or a business with an open listing.  Every broker keeps a list of active Buyers which makes co-brokerage a useful technique particularly for smaller profitable businesses.

Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver the highest price in the smoothest sale transaction possible. Harvest provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with Greg to discuss selling your business, ordering a business valuation or buying a business.

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors
Business Brokers, Business Valuation, Business Transactions
609-664-7955
gcaruso@harvestbusiness.com
www.harvestbusiness.com

Ways to Generate Qualified Prospects – Tips from a Maryland Business Broker

This post lists proven ways to generate leads for your business sale.  Each requires experience and most require quite a bit of work.  Also, several of these may breach your confidentiality if they are done by you directly.  One more reason to always use a knowledgeable business broker.

Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver the highest price in the smoothest sale transaction possible. Harvest provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.

Management of your Company.  We suggest that at least once a year you talk about succession planning with key employees and family members. Over many years, you can determine who in your family and organization might have an interest in your business.  It is then easier to start a conversation by saying, “Although it is still several years off, do you really have an interest…”.   Take this conversation through to preliminary financing etc. before you move up the timetable.

Trusted Advisors.  Sometimes your attorney or accountant will have a likely Buyer.  Professional advisors are a good source for referring Buyers. Talk to that Buyer.  Just recognize that if that person is not the final Buyer your attorney or accountant probably cannot perform the salesman’s role of an intermediary or broker.  If they do, then you should worry about the time they have to do your accounting and legal work!

Internet Listings.  Primarily www.BizBuySell.com , www.ibba.org , www.mergernetwork.com, and others.  This is effective for generating leads if the financial summaries fit the recommended valuation rules of thumb and it is the best source for corporate managers and corporate sales people.  You can also reach competitors who have set an automatic email for anything in their industry.    With Internet listings you need to list a little information about the business to indicate scale and industry and really focus on the numbers in order to generate calls.  The ratios must work in order for the phone to ring so this is an excellent reason not to overprice the business.  If necessary,  make aggressive adjustments in your cash flow and clearly point them out in your package in order to generate leads through this source.

Cold Calling and Direct Mail.   If a competitor, private equity group, or other business is a likely Buyer, both cold calling and direct mail can generate responses.  While the response rates are generally low, again it only takes one Buyer.  You can greatly assist your broker by providing trade association lists and contact points to help them generate an inclusive list of prospects.  Research to identify potential buyers is a very important and time consuming part of the work when this technique is appropriate.

Industry Magazines and Websites.  Some industries have trade magazines and websites where ads are occasionally posted for business acquisitions and sales.  Sometimes these can be effective.

Suppliers and Jobbers.  In some industries, suppliers and other people who work regularly with many companies may know people interested in buying businesses.  Obviously this does not work if maintaining confidentiality is important to you.  This is pervasive among liquor stores.

Once you have some interest qualification of your prospects becomes key.  Ah – the need for a future post.

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors
609-664-7955
gcaruso@harvestbusiness.com
www.harvestbusiness.com

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