Key Value Indicators in Evaluating a Business

When looking to execute a transaction such as selling your business, it is often beneficial to put yourself in the shoes of the buyer, to determine what characteristics are seen as favorable or unfavorable to the market. A sophisticated buyer is going to come to the table with a list of questions and concerns about the business, so taking a proactive approach to identifying these things and working to improve them will pay dividends in the long run. The following is a listing, among many, of indicators that should be evaluated during this process.

Customer Base:

In most cases, having a broad customer base both in number and across economic sectors is seen as preferable, as it reduces risk associated with companies going out of business or a sector of the economy contracting. Having a broad customer base has been proven to be a key indicator of value, especially during 2020 with the economic impact of COVID-19 straining resources for many organizations. 

Customer Relationships:

The turnover rate, or the amount of customers that are retained on a year-over-year basis, is a good way of evaluating customer relationships. A high turnover rate can indicate that the company is not performing to the level of expectation of the customers. In addition, a high turnover rate often means higher costs associated with bringing in new business. 

Historical Profitability:

Although this has been proven wrong by many of the exit events within industries such as tech, in most cases a company with a history of solid profit is going to be seen as a favorable target to a buyer. Even in cases where the company has not yet turned a profit, an investor is still going to want to see a solid strategy in place to eventually become profitable. Regardless, profit should still be evaluated to determine whether it can be replicated going forward, and that “profit” as shown is not mostly a result of non-market conditions that might have lowered costs of the business during a limited timeframe.

Receivables:

When compared to industry averages, the amount of day’s sales that are currently receivable will indicate how effective the company is at collecting on jobs completed for customers. A high number of days sales indicates that customers may have trouble paying, and could lead to cash constraints down the road. 

While these metrics mainly focus on quantitative factors that can be measured with numbers, there are also many qualitative factors, such as age of the business, motivation of the owners, and the capability of the management team, that need to be factored as well. Performing a thorough self-evaluation of the business puts a potential seller in a place to maximize the value received for the business.