As a Sales Xceleration Advisor, I often work with small business owners contemplating the sale of their company. In the secession planning “industry” a truism often stated is, “If you plan for secession 3-5 years before a triggering event, you will probably more than double the value of the sale and greatly reduce the amount of tax that you will have to pay.” Unfortunately, many owners don’t plan for secession and when a triggering event occurs, their company sells for much less than it is worth – if it sells at all. It is often quoted that only 1 out of 3 privately-held companies successfully transition through secession.
So, let’s take a closer look at what needs to be done. The following 5 sales metrics need to be managed before you sell your company to increase its value and facilitate a successful transition.
1. Profitability. This is the one metric that almost every business owner looks at each month at an overall company level. However, I propose that if profit is measured by salesperson, by product, by customer, by industry, and by geographic region (if appropriate), much better business decisions can be made to position the company for even greater profitability. Additionally, with this detailed information, a potential buyer’s perception of risk is reduced – which translates into a higher company valuation.
2. Revenue. This too is a metric that many, if not most, business owners watch. It is important to not only assess month-to-month numbers, but also to compare the same months in previous years. With this data, trend analysis reports can be automated to show seasonality dependencies as well as the effects of marketing efforts (i.e., advertising, trade shows, social media, etc.). As with profitability, revenue should be measured by salesperson/team, product, customer, industry, and geographic region (if appropriate) on at least a quarterly basis.
3. Customer Concentration. One of the biggest perceived risks by any potential buyer of a business is when there is too much dependency on one key customer, or a handful of customers. Surprisingly, it is not uncommon for small businesses to have a single customer account for more than 40% of revenue, or less than 10 customers account for greater than 80% of revenue. The greater your revenue is reliant on a few customers, the greater your overall risk. Yes, it may be easier to get another order from your one key customer, but in doing so, you are furthering the problem that you already have – too much revenue tied up into too few customers. It will be easier to sell your company (and you will get more for it) if you focus on gaining business from new customers. Your risk will be minimized and potential growth diversified.
4. Product/Service Concentration. You don’t need a massive arsenal of products or services, but if you have just one product or service, buyers will perceive this as a high risk and discount the value of your company. Again, measuring the percentage of revenue and profit by product or service highlights where to apply resources to increase diversity or to phase out poor performing products. This information also allows you to position or package your company’s story for maximum valuations when you decide to pull the trigger.
5. Industry/Market Concentration. As with customers and products, too much concentration in a specific industry or market is often viewed as a risk. What happens when that one industry is affected by a catastrophic issue? You have “all your eggs in one basket” and your revenue goes down in direct proportion to the industry. Diversify, and your revenue will decline but at a much lesser rate. By measuring the percentage of revenue and profit by industry, decisions can be made to diversify into complimentary markets. Yes, again, it may be easier to find another customer in your current market or industry, but the value of your company can be greatly increased if you spend the time and effort to diversify.
The Bottom Line:
If you have a plan of action before a triggering event, you can increase the value of your company and the probability of a successful transition. In order to plan effectively, you need the right information so that good business decisions can be made. Start now. Do not wait. Make the decisions that will make a difference for your legacy and your family.