Last week, we talked about why you should make sure you have strong financial systems to make your business easier to manage. I received several great notes asking me what marketing metrics impact the value and growth of your business. I thought I’d share the five metrics I’d look for when deciding if my organization should buy a business. Though I help clients sell their companies today, you can learn from my experience on the other side of the table! Even if you’re not planning to sell in the short term, these questions help you grow a more successful organization and help you determine the current health of your business.
The first question is how many sales transactions are you doing a year? I want to understand how many deals you are doing every year; I also ask what your closing percentage is. A high closing percentage with low deal flow means there may be significant upside in the business available to a new owner. A low closing percentage with high deal flow means you might be well positioned to upgrade your sales and business development efforts. To be a successful dealmaker, you must be able to see both sides of a number and you must be able to provide your team a better understanding of what that number means to the potential buyer.
The second question is what is the lifetime value of a client or customer? Do you know how much your customer is worth to your business? This number allows you to decide how much money you can invest in getting a client. It also allows a potential owner to more accurately understand how much growth may still be in your business. They can bring more capital and larger sales teams to help increase sales and profits faster than you can. This, again, is a good thing to know when selling your business.
The third question is how many clients or customers do you have? Depending on the type of business, this number can vary widely. What I’m looking for is how concentrated is your client portfolio. This number also provides me a quick risk assessment tool when buying a business because many smaller and midmarket businesses have a high concentration of their business in one or two clients. If this client is lost, the business would fail. I spend significant time working with entrepreneurs to diversify their customer portfolio.
The fourth question is what are the gross margins you are operating at? How does this number match up with others in your industry? If the business is operating at a low profit margin, there may not be significant capital to help grow the business further. If the margins are too large, they may attract unwanted attention from competitors and offshore providers. My experience tells me that entrepreneurs need to have a wide range of products and services with different profit margins to help them obtain a strong position in their markets. Strong financial analysis can provide insights into what prices you should sell your products for, the right mix can help make your business a market leader.
The fifth question is how much is your average sales transaction worth to your business? Many of the most successful entrepreneurs I’ve worked with all have a strong understanding of how much their sales transactions are worth and what needs to be done to improve that number. They have an innate skill in looking at written agreements and sales receipts to determine how much money they might be able to get out of each sales transaction. This number also allows me to better understand how much productivity you’re getting out of your business development activities. I was once told Sam Walton would spend time in his stores looking at individual receipts to better understand his customers buying habits. Before you scoff, Buck Rodgers former VP of IBM said he could do this when he was selling hardware larger clients at IBM. He could identify additional sales opportunities within his best clients by reading their sales agreements.
The bonus question is: how much do you spend on your marketing and sales efforts? When buying or selling a business, it comes down to how much investment it takes to keep the company growing successfully. Most business owners can easily identify the hard cost, but miss the soft cost of doing business. How many soft costs do you include in your marketing expenses? These could include writing blogs, social media, and training and development expenses to keep people up to speed on what is going on in your markets. As we move into the era of the better educated client you must make sure that you are investing to keep growing your business. We will talk about soft costs next week when we talk about the mobile revolution and the impact it has on your bottom line.
We covered several questions that allow you to better understand how your business currently works. If you have these numbers you can implement a strategy that increases the value and sales for your business.
Looking for some mid week motivation today, you might enjoy also Are You Great by Choice or by Chance?
Next week, we share a mobile strategy that could make you successful entrepreneur. I think you may be pleasantly surprised how mobile can add bottom line sales on demand for your best customers. See you next here next week.