As you start the new year, it’s advisable to pay attention to areas of your business to identify problems, resolve issues and measure growth.
Business owners at all stages should follow benchmarking practices – but owners considering selling their business soon or in the future should be especially vigilant.
Likely, you already track some performance metrics in your business, such as profit and EBITDA. While profitability and EBITDA are very important, there are others that many business owners overlook.
Let’s look at some metrics that are equally valuable.
Gross Profit Margin Per Revenue Source and Service
Business owners should review each revenue component whether it be products or services and analyze both the revenue and expenses associated with each. They should also really look at the 80/20 rule in terms of the gross margin per revenue or product.
When is the last time you really studied or analyzed each one of your product or service areas based up on gross margin contribution to the company – including all costs associated with each revenue source? Does a revenue source have disproportionate expenses?
Are these expenses worth the revenue that it brings into your company?
Are there expense components that can be bettered utilized in other parts of your business?
Studying your profit margins across your spectrum of products and services is crucial in bettering your company’s profitability.
Monthly Recurring Revenue Metrics
It is very important to the profitability and value of your business to provide services with monthly recurring revenue. If you do have recurring revenue, you should analyze the cost associated with that revenue (client acquisition, service expansion upgrades, client churn) and understand what percentage of your customers you are keeping, what percentage you are losing and why.
If you do not currently have services that provide monthly recurring revenue, now is the time to put creativity, thought and effort to develop that side of your business
Labor Loaded Gross Margin
If you are running a service business and you have a lot of clients, you need to examine the cost associated with generating gross margin.
Pay attention to which clients demand a disproportionate amount of attention and resources. By looking at profit margins you’ll be able to identify which clients are receiving too much time.
Effective Hourly Rates Spent Servicing Clients
It’s necessary to understand exactly how much it costs to service a client. Once you determine that figure, you’ll know whether you need to charge more. It’s certainly not a good business practice to lose money on a client.
If you can’t make money on the client, then you may need to fire that client or have a frank discussion with the client. So, calculate this metric for each client, analyze the results and increase your monthly fees when necessary.
Customer Contribution/ Client Concentration
While large and loyal customers are an asset to your business, customer concentration of too many large clients (in relation to your total customers) can be a red flag when you are raising capital to expand your business or selling your business. Keep track of customer concentration so that your customer portfolio is in balance and that your customers are evenly distributed across your customer base.
Client Churn Rate
How many clients do you lose each month? And why?
You should be tracking this statistic in your business. Some churn is inevitable but a sudden decrease in customers means you need to take a look at your business. Is it an employee issue? A product or services issue? Are you losing business to a competitor?
The sooner you identify the issue and act to correct course, the quicker your business will recover and rebound.
Employee Churn Rate
Your employees are your biggest asset.
Are you retaining employees? If you are not, why aren’t you?
Is it because of ineffective managers?
Lack of training? What can you do to better train your employees?
What can you do to cut down on this rate?
Are your compensation plans competitive? Are you rewarding and recognizing your employees?
How do your employees stack up against your competition?
How many client leads do you actually convert into new clients? Generating leads is great but a good conversion rate is critical to the success of your business. It’s also important to understand lead source and testing new lead generation strategies when necessary.
Return on Investment
Any time you spend money in your business should be done with the intention of calculating the return on both the soft (employees, etc.) and hard (actual cost of goods – equipment, software, web development, social media, online branding, supplies, etc.) to generate that income. Understanding this information – and making adjustments based on it – is critically important..
There are many metrics to choose from in running your business. The most important thing is to choose the ones that will benefit you the most in growing and maximizing profits for your business. And, in the end, using good metrics will pay off for you when its time to exit and sell your business. Buyers do pay more for well-run businesses with strong processes in place.
This article was written by Harvest Business Advisor Partner, Richard Stopa.
Clients choose Harvest Business Advisors for our accurate business valuations and our proven ability to deliver the highest price in the smoothest sale transaction possible. 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 firstname.lastname@example.org or 877-838-4966 to discuss selling your business, ordering a business valuation or buying a business.
The three partners at Harvest Business Advisors – Greg Caruso, Eddie Davis and Richard Stopa – have helped hundreds of business owners sell their businesses. Each business sale process is unique – but the questions we are asked by the owners remain fairly consistent.
1. When should I sell my business?
Sometimes this question is in response to changes in the economy or the stock market. Or an owner is feeling discouraged about sales or challenges in the business.
The answer is “It Depends”. We do not have any special forecasting skills to help you make a decision. But we can tell you that business sales usually take 9-18 months, so selling is not a quick fix to a downturn. While your business is on the market, you will need to continue to run your business, upgrade systems, keep an eye on profit opportunities, document processes and keep key employees engaged. It’s essential for the sale of the business.
Other times this question is in response to internal or personal changes. We hope you are not dealing with health issues, but if you are, the time to plan is now. If you are not as satisfied running your business, an exit planning session can help set goals so you know you have options, if and when you decide to sell your business.
2. How much money will I get?
This is another question without an easy answer. But realize that pricing is an art form – too high and all the buyers will be chased away, too low and you will not receive full value. It’s important to have a business valuation to establish a baseline value which will help you to determine how to price your business.
Be prepared for bargaining from buyers (that’s their role!). It’s not meant to demean your business, but it is part of the process.
3. Who would buy my business? How do I find buyers?
Usually, business owners think about competitor who might want to purchase their business. And we see that happen quite a bit. It’s an easy way for a business to expand their client base, their equipment and personnel. But that is certainly not the only option.
Business brokers try to look at complementary businesses who would grow their business in a new direction. An example would be a landscaping company who purchased an irrigation company. Or a law firm who acquired a consulting firm that could expand the services they provide their clients.
We also use professional associations to find businesses and business owners who are aligned. Sometimes there is an employee who is ready to be their own boss (sometimes that employee works for you!)
Business brokers, especially those who have been in the business for a few years, develop relationships with people looking for the “right” business and investors who are seeking profitable businesses to invest in. We also focus on finding more than one potential buyer, to develop an “auction” atmosphere (and a higher selling price).
4. What do I tell my employees? And when?
Long before you decide to sell your business, you should protect yourself by having your key employees sign Non-Disclosure Agreements (so they do not discuss the details of your business with anyone outside the business) and Non-Compete Agreements (so they cannot work for a competitor for a specified period of time). Both of these agreements can be customized to be fair and equitable to you and your employees.
We generally recommend not telling your employees the business is for sale until the sale is final, with the exception of key employees who may need to be involved in the due diligence process and meet with the prospective buyers. Guaranteed, your employees will know something is going on. The best you can do is present the business sale as a positive for them, an opportunity for growth.
5. What will I do after I sell my business?
There’s a question we cannot answer! After a transition period with the purchasers, most “former” business owners take some time getting used to their new normal. Some spend time improving their golf game or finding new places to fish. Others make up for lost time with their families. We’ve seen people buy an RV and hit the road – or discover a passion for giving back in their communities. The bottom line is, after your business is sold, you will decide what is next, what will make you fulfilled and happy.
If selling your business is on your mind, we’d be happy to talk to you about what to expect and the options and timing. We can have a relaxed conversation by phone or over coffee to answer some of your questions. Feel free to reach out to us!
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 email@example.com or 877-838-4966 to discuss selling your business, ordering a business valuation or buying a business.
Harvest opens up Business Brokerage and Business Valuation Office in Princeton New Jersey serving Philadelphia to New York City.
Harvest Business Advisors, Lower middle market merger and acquisition advisors, business brokers, and business valuation experts has opened up an office in Princeton, New Jersey. Greg Caruso, Partner said, “Princeton is the perfect location to service business buyers, business sellers, and people needing business valuations in New Jersey and Eastern Pennsylvania markets. We can easily serve business brokerage and business valuation customers in Philadelphia, PA, Cherry Hill, NJ, Trenton, NJ, Newark, NJ up to New York City. We are excited to have this second location to better serve our expanding business brokerage and business valuation base. The New Jersey office phone number for Greg Caruso is 609-664-7955.