Eight Key Performance Indicators in Evaluating Your Business

Organizations interested in preparing for a potential sale or just looking to amp up the overall value and performance of the business could be well-served by considering how they rate on eight key performance measures. These measures were developed to help businesses understand their “Value Builder”1 score and have been tried and tested to correlate to the value received by business owners in thousands of sales.  What is important is that these factors are critical to the value of a business at any stage of its lifecycle, not just when getting ready for a sale.

  1. Financial Performance – A basic principle of a good business is determined by how much revenue you bring in and how much profit that revenue is turned into. Revenue, expenses, and resulting profit must consistently be examined for opportunities to improve. Sustained performance over time, substantiated by solid financial processes and reviews, is essential to demonstrating repeatable performance.
  2. Growth Potential – While yesterday is important, tomorrow is almost more so, particularly when we talk about growth. Your company’s ability to grow consistently and predictably will be the reason a third-party may have interest in investing or purchasing your company. The ability to grow is anchored in the scalability of your business – geographically, horizontally or vertically – and the consistency of systems and processes that are documented and portable.
  3. The Switzerland Structure – The world knows Switzerland as the neutral party, and when a company is evaluated to determine its strength, one of the important underlining elements to understand is whether the company is overly reliant on any one employee, supplier, or customer. When those situations exist, it puts the company in a compromising position should something happen to the employee, supplier, or customer.  A diversification strategy can be an important tool to increasing the strength and resilience of a company.
  4. The Valuation Teeter Totter – If a business creates regular, consistent cash flow, minimizing the constant need for cash infusions, the business operates more smoothly, and its value benefits. Growth consumes cash so having a strategy to build cash reserves can create significant value in the eyes of a buyer or investor.
  5. The Hierarchy of Recurring Revenue – Predictability of sales and the resultant revenue is very important when looking at the potential value of a company. Creating recurring revenue streams not only reduces sales-to-cash cycle but creates the opportunity to retain clients for the long term. Recurring revenue is one of the strongest supports for increase business value.
  6. The Monopoly Control – When your products are unique, when your service is exceptional, or when your firm is the best in the marketplace at what it does, this creates differentiation and distance between you and the competition. Differentiation and innovation is the engine for growth and a strong cash position is the fuel. The more this exists with your business, the more valuable it is.
  7. Customer Satisfaction – Do your clients like your service? Do they like your products? How about the experiences they have with your employees? Satisfaction is important to understand and build upon through each stage of the customer life cycle to create loyalty and ultimately, advocacy, for your business and products or services. Demonstrating sustained customer satisfaction and scores can be a strong indicator that the business will continue to be successful and continue to increase it’s value.
  8. Hub & Spoke – Can your business operate without you, or do you need to be involved in everything – every decision, every client, every day? If you’re involved in everything, what happens when you’re not there, whether for a vacation or a long-term illness? Things will likely suffer, even potentially putting your business at risk to survive. Not only do your employees, suppliers, and clients suffer when this happens, so does the value of your company.

These concepts are nothing more that sound business principles and philosophies. The difference lies in understanding how they work together to drive the value of a business, where you stand today in your business and what you can do to implement change to improve the value of your business. Whether you plan to sell in the next 3-5 years or build a legacy business that survives to future generations, it is (almost) never too late to act.

1John Warrillow founded The Value Builder System™ to level the playing field for business owners as they approach their exit. The Value Builder System has 55,000 users world wide who leverage the system to grow their company’s value by as much at 71%. John’s best-selling book, Built to Sell: Creating a Business That Can Thrive Without You, was recognized by both Fortune and Inc. Magazine as one of the best business books of 2011 and has been translated into four languages.

Bowers & Company CPAs aims to offer helpful information to our clients and friends. Learn more about how we can help should your small business need accounting and financial services.

Disclaimer: To ensure compliance with requirements imposed by the Department of Treasury, we inform you any U.S. federal tax advice contained in this document or video is not intended for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

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