Nine drivers that make a business valuable
Kobi Simmat explains the top growth metrics buyers look for in a business. The more you get right, the more you’ll get for your 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 what your current […]
Kobi Simmat explains the top growth metrics buyers look for in a business. The more you get right, the more you’ll get for your 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 what your current results are today. They want to know what your potential results are going to be too.
Secondly, you need to think like a business buyer. If you were buying a business, what would you look for? Write that down and use that as a guideline for how you’ll build your business.
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:
- Net profit
Net profit is the money you get to hold onto. This number comes last on the profit and loss statement, which is why it’s called ‘the bottom line’. Net profit = Gross profit (or total income) – all expenses
- 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. Asset turnover = (Total revenue/Total assets) x 100
- Strike rate
The strike rate is calculated by dividing the total number of sales by the total number of sales opportunities. For example, how many prospects were sold to relative to the number of leads. Strike Rate = (Enquiries or leads/Number of sales) x 100
- Annual contract value
This metric tells you about the revenue an investment has generated over a period of 12 months with regards 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
- Monthly recurring revenue/subscriptions
This metric tells us about the earnings that a company generates every month and identifies the likely income stream that will be generated in the future. Monthly recurring = (Average monthly revenue per customer x total number of accounts)
The non-measurable factors that buyers take into account:
- Intellectual Property (IP)
Do you own your own IP, can you prove it, is it valuable? Can you demonstrate that you own it? The buy will want to see written evidence that you do.
- 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?
- 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.
- Good governance
Are your records up to date? When I sold my business, they wanted to see all our employee contracts, equipment leases, client agreements, real estate leasing documents and bank statements for the past three years. In total, I had to supply over 300 documents to them. Exhausting!
It’s important to remember that business buyers won’t assess your business based on just one or two metrics. 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 looking at.
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.
Kobi Simmat (pictured) is a self-taught expert in business management, advisory services, and the founder of Best Practice Biz. He achieved a $20 million valuation and then a successful sale of his business and now helps others unlock the full potential of their businesses. Download your free chapter of his new book How to Build a Business Others Want to Buy at www.kobisimmat.com