Building to Sell: What Financial Metrics Should You Track from Day One?

We’ve seen many businesses that have had interest from a buyer even though they weren’t looking to sell. At this point, most business owners will consider an offer, at least temporarily. 

However, the business is usually not in an optimal position to get the best valuation and terms when it comes to talking numbers. This is because they have not prepared their company to present and haven’t evaluated the financials of their business in a way that attracts great offers. This is why it’s essential to prepare for a sale as soon as possible and to maintain that preparation until you are ready to sell.

Keep this in mind: buyers of businesses typically perform many transactions, while an owner of a business will only sell it once. The buyer has a significant advantage simply due to their experience. You can level the playing field by understanding what buyers are looking for and preparing your company to exceed those expectations. This will require outside experts (investment bankers, financial experts, and lawyers) to be familiar with the process so they can adequately prepare you.   

Reporting

Your reporting must improve to the level where potential buyers can favorably evaluate your business.  With enhanced reporting comes the benefit of more informed decisions.  This can lead to higher sales, profit, and cash flow, key ingredients for better deal valuation and terms.

Planning & Analysis

Developing a financial plan and relevant metrics is a requirement to sell your business. Every investor will ask you for your plan, as well as ask for how you historically performed against that plan.  There is a considerable benefit to financial planning: it focuses your efforts on achieving the financial metrics required to support the valuation you seek. 

You should track monthly goals for revenue, profitability (gross and net profit), and cash flow.  A typical plan projects monthly financial statements for the next 12 months. After each month, generate a financial report showing actual performance vs projected. Meet with your team to discuss performance and ways to continuously improve it.

Industry Key Performance Indicators

Buyers of companies in your industry will be evaluating your company against others. It’s essential to track growth in operational metrics that impact financial performance.

For example, a SaaS company will be expected to track Customer Acquisition Cost (CAC) and Lifetime Value of a Customer (LTV).  By comparing these metrics to industry benchmarks, a buyer will evaluate whether you are a leader or a laggard in your space. Research what KPIs buyers are measuring in your industry and start tracking them now. 

Valuation Benchmarks

Valuations are primarily based on multiple sales and earnings. These multiples are derived from deals in your industry during the current market conditions when you plan to sell.  While they can change, they are generally consistent over time.  For example, a software company with a solid recurring revenue model will fetch a valuation higher than one with a traditional licensing model due to the predictability of its future cash flow. 

Ask investment bankers who serve your space or do some research to see the multiples of companies recently sold in your industry. Apply these multiples to your earnings to see how an investor will evaluate your company vs. other acquisition candidates they see.

Availability of Data

The difference between companies that sell for a premium vs. those that sell at a discount is their ability to know their numbers. This means readily available data that is easy to understand.  If a well-prepared company is asked for its financials and KPIs, it will have an advantage over one that does not.  This is evident during due diligence. Taking too long to respond to data requests and providing data that is inconsistent, incomplete, or unknowable can kill a deal. 

Companies that are serious about selling have already prepared a “data room” of information that a buyer will request.  This includes all relevant information, not just financial information. 

Buyers want this data for several reasons:

1. They are evaluating your company against other deals they are considering
2. They want to know about any undisclosed liabilities that they will inherit when they own the company
3. They are mitigating the risk they assume when they own their company

Benefits For You

Tracking metrics used by buyers to evaluate your business not only helps you get a better deal. It helps you run a better business.

Since company buyers tend to be acquisitive, they monitor their investments post-close. They apply what they have learned to new acquisitions to extract as much value from it as possible.  With so many financial buyers in the marketplace, many companies are sold again after a few years. In order to extract maximum value, the buyer has to be sure the company will perform to its own Return on Investment requirements.

By adopting the practices of a buyer to your organization, you can create a culture of accountability,   develop the reporting and planning systems to provide the data you need and empower your team to execute.  It will require an investment of time and money - but the payoff of an exit on a valuation and terms you’re happy with is well worth it.