In a world where you have thousands of businesses available to purchase at any given moment, and many of these businesses having really attractive selling points, what are some really simple yet powerful, and under-the-radar, aspects of a business that go a very long way to attracting the premium buyers? We have two suggestions that we highlight here.
The Single KPI That Matters
Like the saying goes, “If I had more time, I would have written you a shorter letter.” The same is true in understanding where a business has been, where it is today and where it is going. We understand there is more than one way to measure a company – you can have an entire glossary of Key Performance Indicators (“KPIs”). But what if you only had one KPI; what would it be? And if you could come up with just one KPI, could you go back and accurately represent that KPI historically? Could you forecast this KPI? Can you predict it?
When we break down a business into its most basic building block, and then show great proficiency in tracking that metric over time along with a credible forecast of where it can go… This can be the North Star in a transaction process and has powerful implications. Buyers are creatures of data. And in the absence of such data, a buyer will invariably try – many times in vain – to come up with their own. This will lead to trouble or a less-than-ideal transaction. Conversely, if you present a story around a particular KPI, you then are telling the buyer that not only do you understand your business, but you also know how to measure it AND know how to grow it.
So the question is – what is the right or best KPI to develop and then measure? This depends on the business of course but here are some suggestions. For a manufacturing and distribution businesses, we have found it is best to keep the focus on a KPI that delineates the product share of its market, or its margin profile coupled with the customer acquisition cost. Both of these concepts can be articulated with single KPIs. For tech and/or service businesses, KPIs that work well include lifetime value of an average or median customer less acquisition cost over time, or annual subscription or contracted revenue. While these KPIs can be conceptually very simple, there are significant data underpinning their integrity. Demonstrating a long-term history of these KPIs showing a consistently upward trend will go a very long way.
Time to Close the Books
This metric is by far the most underacknowledged and seemingly minor detail in the M&A world yet has profound upside for sellers. Here is the cold hard truth: Nobody, especially buyers, and especially today, likes when a potential target takes a long time to close its books. We all know we are in the age of information so it shouldn’t be too surprising to hear that buyers and investors expect timely information.
So what constitutes long? It’s a tough question to give a specific answer as every business has unique challenges to account and represent its financial statements. Fifteen years ago, closing books inside of a month was acceptable and good. Now? Generally two weeks after a month end is considered market. Ten years from now, we expect the standard will be one week. The point is that the information needs are coming in with higher expectations and quicker demands and we expect this to continue.
Let’s keep this positive and here’s what you really need to know. Before you start engaging with any prospective buyer or investor, spend the time to review your financial and accounting closing procedures. Chances are during this review, you will discover a few unnecessary bottlenecks that can be removed or greatly mitigated. Furthermore, chances are that this review will lead to shortening the time to close your books and produce a summary level financial overview of the your last month along with the corresponding underlying detail. If you are closing your books in 30 days, and you can improve that to 24 or 25, well then you have two things that drive interest in your business: 1) you have demonstrated that you can enact initiatives to drive more efficiency in your organization, and 2) you have also demonstrated that you care about financial metrics and the timely reporting of these metrics….because guess who is also going to care – yes, whomever is interested in your business.
In case helpful, here’s how we keep score on this metric:
- If you can close your books within 1 calendar week of the month end, then you have an A+ accounting function
- If can close your books within 2 calendar weeks of the month end, then you are doing fine but don’t expect to impress too many people: B+
- If you close your books within 3 calendar weeks, then you’ll need to know this is more than likely average: B–/C+
- Try to do better than a 4 week close.
You get the idea. The quicker you can close with accuracy the better you’ll be perceived by potential buyers and investors. You will be sending them the right message – that you care deeply about the financials and you do a great job with your accounting. Even if you are unable to get the books closed, you can still supplement with other data to “buy yourself some time”. Flash reports that show gross revenue compared to the prior year and/or to budget typically goes a long way and keeps the conversation going in the right direction.
