How to Find a Business Broker

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How to find a business broker.Whether last year caused changes in your life, or you’ve resolved to take an entirely different direction this year (or both), buying or selling a business is one of the most important decisions anyone can make.  The successful outcome of these possible transactions will be due in large part to your choice of business broker.  In this article we will talk about how to find a business broker in 2021 (and beyond) to help you make the best choice for your future.

Must Haves

We’ve already said that buying or selling a business will be one of the most important decisions (financial and otherwise) of your life.  That means that hiring the right broker will either be the very first decision a buyer makes or the very last decision a seller makes.  We think there are three indispensable qualities all business brokers should have:

  1. Knowledge.  There’s so much knowledge that goes into being a broker.  Brokers understand the sale process and the worth of valuations, as well as how to properly market and price your business.  They have solid broker agreements that are simple to understand.  They may also have certifications that attest to what they know.  They understand the importance of confidentiality throughout the process and will explore tax and legal questions with you.
  2. Experience.  There is simply no substitute for experience.  Don’t be afraid to ask brokers how many years they have been in the industry and/or how many deals they have been part of.  Now, everyone has to start somewhere in their broker journey, so be willing to consider someone who has a lot of experience in your industry even though they may not have been brokers for decades and decades.
  3. Industry Knowledge.  While brokers work with an impressive variety of businesses, over time particular industries or business sizes become sweet spots for them.  Don’t be afraid to hold out for a broker, or broker team, who have the proven experience.  That experience will often lead to better outcomes for you.

Very Important

These next two qualities aren’t “deal breakers” but we consider them very important:

  • Connections.  There are going to be other people who are going to make this journey with you, bankers, accountants, attorneys, etc.  A broker with a lot of connections can help you find a missing resource of your transaction that you might not otherwise have obtained on your own.  Not everyone networks in the same way, but networking is indispensable for brokers, and also tells you a bit about how they conduct themselves.
  • Likeability/Compatibility with you.  You’re not going to marry your broker, but you should consider the realities of a 3-18 month relationship: you are going to be working together on a serious and intense project, involving highly personal issues, from the start of your transaction to the end.  If your initial meetings aren’t going well, that might be a sign to keep interviewing.  Do not discount the importance of getting along well with your broker: that relationship will keep you going through the challenges that will surely be ahead (as they are) on your business buying/selling journey.

Where to Look

The best place to start, obviously, is with the people you know.  Check with your CPA, attorney, business coach, etc. to see if they know anyone worth checking out.  Next, discreetly put out feelers in your social circle.  If nothing comes up within these inner circles, consider looking up some of the business brokerage/M&A firms in your local area.  Check for testimonials and reviews but also take note of some of the names of the principals and brokers and head over to LinkedIn.  Type in their names and see if you already have a personal connection (LinkedIn will show you if you do).

All throughout the process, remember that knowing where you want this journey to begin (or end) is an important landmark to help you find the right person.  Share those thoughts in any interview with a potential broker: the answers will be a helpful guide to the conversation.

Obviously we’ve got a team of talented people here for every type of business and personality.  Take a look at our team or give us a call today: we’d love to chat with you!

Using a Deferred Sales Trust in a Business Transaction

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Deferred Sales TrustThe incoming presidential administration has indicated its desire to tax certain earners’ capital gains at the same rate as their personal earnings.  That has led to us getting more questions here at Apex about ways to reduce exposure to capital gains.  One of these ways is called a deferred sales trust.

What is a Deferred Sales Trust?

Simply put, this is a vehicle one can use to defer capital gains taxes.  This is something that must be set up prior to a sale and, unlike the well known 1031 Exchange which is for real estate transactions, a deferred sales trust does not impose strict, short-term time limits on your proceeds.

How Does it Work?

The trust buys the business from the seller (this can be set up in a contract to be concurrent with the purchase from a buyer).  The seller can set up a contract that allows the trust to pay for the business over time.  In a sense, it’s seller financing…for yourself.  As you withdraw from the trust (on a timetable that you set up, that can be modified) then you will be taxed at that time, and only on those amounts.  Even better?  Those funds can be used to make investments which are not subject to the capital gains that you incurred on the original transaction.

Some conditions include:

  • A third party must be the trustee
  • The trustee can invest those funds in new investments
  • The trustee is responsible for making your disbursements or making modifications to the disbursement schedule
  • Capital gains are to be paid on any principal amount the seller receives from the installment payments.  As we noted above, the trust can make investments and earn income and hence could also be “saddled” with non-taxable (to you) interest on your payments.

What’s the Catch?

We’ve always said that it’s key to not fall afoul of the IRS.  You shouldn’t look at this vehicle solely as a way to “avoid capital gains.”  You won’t be able to.  All you can do is adjust the time of paying those taxes to your choosing, but that also means not taking all the gains from your sale at once.  If getting your proceeds in an installment fashion suits your lifestyle, this might be an ideal way to go.  You can also negotiate the payment amounts, so if you need a lump sum up front before moving to smaller payments, that’s possible.

The main “catch” involved is picking the right trustee.  This isn’t just because this person will be in charge of the proceeds of possibly the largest transaction of your life, but because he/she will also oversee investing that money.  Remember that capital-gains-free earning of new income via investments is a major benefit of this vehicle, so as much as you might want to just ask a family member to “help you with this one thing” you’re probably going to need to bring in a professional who can help you optimize your investments.

Speaking of professionals, that’s who you’re going to want to consult to help you examine a deferred sales trust: a lawyer in consultation with your financial team.  This sort of vehicle isn’t for everyone, but as tax conditions change in Washington, people should examine their options and be prepared to have different ways to execute their transaction, should they wish to do so.

We don’t create trusts at Apex, but we know great people who do.  If you need a referral, give us a call and we’ll connect you.

Buying and Selling a Business in 2021

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Buying and Selling a Business in 2021Some people are looking to the new year as some kind of meaningful break with 2020, as if viruses or world events pay attention to a calendar and begin or cease based on what we call a “new year.” Unfortunately, that’s simply not the case. We’ve seen a lot in our time as brokers, but 2020 has been one for the books. But, we’ve also learned a lot, and we want to share some of those thoughts with you in these final weeks of 2020.

Elections

We talked about financial implications for business sales in an election year back in January. It seems as though there may be some change coming, though it is unclear how soon that will happen, as legislation needs to pass through the House and Senate before landing on the President’s desk, and as of right now, the makeup of the Senate is still undecided. Any other year that might be crazy, but in 2020, it registers as just above ho-hum.

Takeaway: The uncertainty about the election is now over. The uncertainty about what comes next will now commence.

PPP

We told you all about PPP when it was first widely available and then we wrote about PPP forgiveness when it recently started to happen. While the question of PPP loans on the books were holding up deals both because buyers were concerned about the status of the loans and banks were unsure how to classify “possibly forgivable” loans, that’s going to be less and less of an issue as more loans start to move through the forgiveness cycle.

Takeaway: The uncertainty about the status of PPP loans is mostly over. But there’s uncertainty as to whether there will be additional support or loans in the new year with a new Congress.

The Markets and Banks

The markets have reacted unusually, to say the least, this year, both at home and abroad. Even as trillions of dollars were added to the national debt, the markets acted bullish at times. Banks, as we might have expected, got more cautious and started asking questions we had not seen before.

Takeaway: It has not yet been a full calendar year since the shutdowns began. When businesses are able to start comparing month-to-month starting in March 2021, the markets are bound to react.

Uncertainty

So, as we can from the examples above, 2021 will change nothing in terms of certainty.  Indeed, business, like life, is filled with uncertainty. Every other year we have sold businesses we’ve never made guarantees, and this year is no different. You can buy a healthy business, and through your own bad practices, run into the ground. We’ve seen it.  You can buy an ailing or average business, and build it up. We’ve seen that too. 

In 1939, no one was saying, “Well, let’s wait until 1940 to see how things go.” We have no idea how things may go with Covid-19, or whatever other diseases or disasters may be looming out there for the human race. But while we know life may seem to slow down during national and international crises, yet it must go on. You have to ask yourself how long you are willing to put your life on hold in exchange for more certainty, which cannot offer you any guarantees anyway. And if there is no more certainty one year from now, you will have lost a year that you could have used to buy and build a business, or sell a business and enjoy the rewards.

We don’t have all the answers, but 2020 has simply reminded us of what we’ve always known: in troubled waters, we have to keep rowing while keeping to our principles and adhering to our compasses as best we can. We are here to help you do the same.

3 Reasons Deals Fall Apart

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Three Reasons Deals Fall ApartThere are many reasons deals can fall apart, some of which are too crazy to be believed. But we do see some that occur regularly, and in the hopes of educating our readers so that they don’t fall into these same traps, we want to discuss three of them. 

1. Attitude

It’s not important that the buyer and seller become best friends. But we do think they should meet. And they do need to have healthy professional and personal attitudes before, during, and after the transaction.

Professional Attitude

This process takes time. A lot of it. It will really feel like a job, at times. You will need to keep in mind that this is just how business transactions happen. Boxes have to be checked. Diligence has to be done. Leases have to be negotiated and handed over. Banks need to look at spreadsheets. Sometimes the SBA is involved. It’s not personal. It’s just business.

This attitude also means that a buyer doesn’t have an ego-driven notion of what the business is worth. A business’ price is subject to two things, primarily. A valuation, and market conditions at the time the seller goes to market. A buyer can object to these realities, but the ones who get to a successful transaction are the ones who are willing to undergo an attitude adjustment and get away from what they think the business is worth and focus on what the market thinks it’s worth.

Personal Attitude

At times, negotiations and diligence items can feel personal. While those feelings are understandable, the reality is that none of it’s personal. Buyers are looking under the hood, trying to make sure they understand everything they can to make a successful go as a new owner. You’re not used to being scrutinized as an owner, after all, you run the place. When you are feeling discouraged or want to lash out, stop typing that emotional email and give us a call. What’s great about being a broker is that we’ve seen both sides of transactions so many times that we’ve probably come across your particular flavor of discontent (and we know how to help you deal with it).  

2. Failure to Disclose

There are many things that can come up before and during a transaction. People can have personal problems that directly affect their ability to sell a business. For example, a business partner can end up refusing to cooperate or a spouse may not be willing to wait until after a transaction to file for divorce. Sometimes leases or liens (or even court cases) get “forgotten” about.  

There are many remedies we have to deal with challenges, but we can’t help fix what we don’t know about. There are a number of times that we’ve been in the weeks, days, and even hours leading up to closing when we find out something that puts a screeching halt on everything. The retort of, “I didn’t think it was that big of a deal” is usually heard. Anything you can think of that you might disclose, mention to us. You’re never going to hear a broker respond, “Why did you waste your time telling me that?” More information means we’re better equipped to help you.

3. Business Neglect

As we mentioned above, due diligence and preparation for a sale can (and often does) feel like a job on top of running your business.  The more prepared you are (clean books, timely tax payments, coherent financial statements), the less time you are going to have to spend getting those in order for a buyer. Your business and your employees need you to continue to function at your best not only for your own financial well-being (you don’t want the business to stop performing well) but for the incoming buyer (you want them to have the best start possible).

In the worst cases, businesses get neglected enough by the seller to cause a material change in the value of the business, which can lead to a renegotiation of the price. Don’t let that happen to you. Keep your eye on the deal and your business, knowing that patience and a good attitude will bring you to a successful conclusion.

We want to make sure your business deals get to the finish line, not fall apart. Contact us today to see how we can help you!

Three Reasons We Might Not Take Your Business Listing

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Three reasons we might not take your business listing.The truth is that we are always looking to add to our inventory of listings. We want to give potential buyers as many choices as possible. It reassures them that they are choosing from the best of several opportunities, not just fighting for the scraps of a handful of listings. But that doesn’t mean we’ll take every listing that comes our way. In fact, sometimes we have to simply decline to list certain businesses. In this article we’ll discuss the three biggest reasons why we might not take your business listing.

No Clean Books

Serious business owners don’t just have clean books and regular access to intelligible financial statements, they actively use them in order to understand the health of their business. Clean books mean not just putting charges and expenses into some catch-all category, but being as specific as possible as often as possible, so that you can see changes month-to-month, quarter-to-quarter, year-to-year.  

Clean books are inextricably linked to being on good terms with the IRS.  You should have no serious tax issues nor should you be playing games in order to evade taxes.  While the IRS is the immediate issue for those who don’t take regular payment of taxes seriously, no buyer feels comfortable getting into a transaction with someone who feels comfortable trying to pull one over on Uncle Sam.  

No Processes

Almost every month in these pages we will talk about a variation of this familiar theme: have systems and processes in place. If you’re building a business to sell, it needs to be able to not just survive without you, but thrive without you. A good rule of thumb is 30 days. If your business can survive without you for 30 days, then you have something that you can probably sell. If it can’t, you probably own a job.

Every buyer dreams of being handed some kind of manual that explains everything about how the business runs. If you want to sell your business someday, you need to be writing that manual now.

Bad Attitude

There are many ways that sellers can have poor attitudes, but the two we confront most often are: 

  • Some fixed notion about what the business is worth, tied to emotions instead of hard financial facts.  Valuations, not opinions, help determine what a business is worth.  The market then determines how true that valuation is.  Neither the valuation nor the market cares about what you think the business is worth.  
  • Slowness or obfuscation when it comes to key documents or key questions we have about the business.  The way that you work with your broker is a good indicator of how you’re going to work with a buyer.  If you can’t (or won’t) answer important questions or get us key documents to help us understand your business and decide whether we will accept your listing, there’s very little chance you’re going to make it through due diligence, when the both patience and timely responses get you to the finish line.

Any one of these reasons is enough for us to refuse a listing, but the good news is that each of them can be turned around, with a little self-awareness and a lot of sincere effort.  If you need help with addressing these problems, don’t hesitate to contact us!

Five Steps to Selling a Business

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Apex Business Advisors: Five Steps to Selling a BusinessAnother article about selling a business? Well, we’re business brokers, so we believe in stressing the fundamentals. A business sale is often the most significant transaction an individual participates in during his/her lifetime. And those who master the fundamentals have the most successful transactions.

Step One: Assemble Your Team

There are four key team members you should have assisting you in your transaction:

  • Accountant – This should preferably be the accountant that you have always had working on your company’s finances. But in case he/she doesn’t have the bandwidth/desire to assist you with this task, you might bring in someone else with experience in business sales and tax strategies.
  • Financial Planner – This person should work hand-in-hand with your accountant to figure out what to do with your free-and-clear proceeds that result from the sale. They can often offer you strategies to maximize value and lessen tax exposure.
  • Attorney – Someone to represent your legal interests in the transaction. If you don’t have a trusted resource in this department, we have trusted partners we can refer you to that we work with often.
  • Business Broker – We’re going to help make sure this team is pulling in the right direction. Most of all, we’re going to help you stay focused and on track towards the closing date.

This team is what you’ll need for most Main Street (less than $5M annual revenues) transactions, but it can definitely expand as the transaction size increases, to help cover the increased diligence issues.

Step Two: Prepare Your Paperwork

Before selling your business, you can get ahead of the game by asking your broker to get you a diligence checklist for a business that is in your industry or comparable in revenues. The longer you have to work on this list, the less it will seem like term papers of long ago and more like a simple marathon with milestones you keep hitting.

Step Three: Think About Deal Points

There’s no way for you to anticipate what a person buying a business will have as his/her “must haves”. But you can certainly make your own list, as well as your own “red lines” that you won’t cross. Keep in mind that this needs to be a discussion you have with your broker. In your own mind, “must haves” can be very serious, and red lines can be very red indeed. But that might be simply because we’re lacking context or don’t have information about alternative ways to proceed.

There are thousands of ways to get a deal done (we’ve seen most of them!) so if you’re proactive, your mind will be in “deal” mode when you start dealing with a buyer. That means you’re flexible. Flexibility often wins in transactions of all kinds, not just in business sales.

Step Four: Look at Comps

Your business may be worth a certain number in your mind. We always remind our clients that their business is only worth what someone will pay for it during the particular time period your business goes to market. Start with a professional valuation, then talk to your broker about current supply and demand in the market for comparable businesses.

What kind of deals are getting done right now and how does that relate to me and my business?

Step Five: Stay the Course

The deal is not done until the paperwork is completed and the check clears. Period.

Make sure that you have operational support as you’re going through this process. Working on a business sale is a part-time job. You want to make sure that your company doesn’t suffer as a result of doing all the things we’ve discussed above to move towards a successful transaction. If you need help, ask. If you’re struggling, tell your broker. But you don’t have to do this alone, and it’s okay to admit you need help.

Do you feel like it might be time to sell your business? Let’s talk about it!

Key Parties in a Transaction

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Key Parties in a TransactionAll transactions end with a buyer and seller signing on the dotted line and checks and wire transfers making their way to their final destinations. But there are many key parties that help get a transaction to that finish line. In this article, we’ll identify those key players and how to make them a winning part of your transaction.

Accountants

Perhaps one of the most important parties in a transaction for both buyers and sellers is the accountant. For a seller, accountants provide accurate financial information, assist with due diligence, and assist with negotiating tax allocation. For buyers, accountants also help with the tax allocation negotiations. They also need to verify the financial information provided in due diligence as well as verify the assertions of the original valuation.

Attorneys

Transactions are legal transactions and hence need the legal paperwork that helps tie a civilized society together. That said, it’s important to find an attorney who is not a deal-killer, and unfortunately we’ve seen more than a few of those in our time.

How to spot a deal-killer? This is someone who lives and breathes fear. Rather than a positive and collaborative mentality that focus on how to move the deal constructively towards a finish line, a deal-killer imagines dragons around every bend in the road, and sows that fear into a client. Unfortunately, sometimes those seeds grow into deal-breaking obstacles. Remember that you are not the first, nor will you be the last, to enter into a transaction. There are always solutions to be found in legal wording to satisfy everyone. Again, what matters is mentality: collaboration or antagonism. Never pick the latter.

Bankers

No money, no deal. It goes without saying that if you’re not privately financing the deal, that you need to be in communication with your banker. They have a lot of regulations they have to deal with so if they ask for some information or paperwork, remind yourself it’s not because they are thrilled to dig into every part of your financial life, but because it’s often just a check box on a sheet that they are following.

Landlords/Franchisors

These can both be unexpected deal-killers and it’s important to deal with these parties transparently and openly from the beginning. As we have alluded to above, convince them that you are not an antagonistic counter-party, but someone who wants a win-win for everyone. Landlords often want to make sure that they have continuity and a clear vision of the future, whereas franchisors want to make sure that you fit their requirements and understand their systems.

Brokers

We would never claim that brokers are the most important parties in a transaction. The buyers and sellers are. But right after them are the brokers, both on the buying and selling side. Very often we are coaches and cheerleaders and researchers. We are the sherpas of a transaction. We are trying to get all parties to the finish line in a cordial and collaborative way. We are the voice of reason when someone starts to let emotions get the better of them. We are the voice of experience when someone asks about the next step in the process. We’re the voice of encouragement when someone feels overwhelmed by the due diligence process.  

All these parties are important in a business transaction, but we hope we’ve communicated that the most important thing you can bring to any transaction is a spirit of positive collaboration.  The deal started with positive hope for both parties, and there’s no reason it can’t end on that note. The right mentality is key, and that’s an integral part of all our transactions here at Apex. 

Selling a Franchise Business

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BrainstormingHere at Apex we’ve sold every type of business you may have heard of, and at least a dozen you could probably have never imagined. But franchise businesses add a few additional wrinkles to the process that it’s important for any buyer to be aware of. In this article, we’ll discuss those wrinkles and how you can smooth them out.

Who’s the Boss?

Unlike other transactions, there’s a third party besides buyer and seller here: the franchisor. Each franchise agreement is different, but many franchisors will include in the original contract that they signed with the franchisee:

  • A right of first refusal for buyback: they can (though often do not) exercise the right to buy back the business from you at terms stipulated in the contract.
  • The ability to vet a buyer: very often these buyers will have to go through the same financial vetting process that the original franchisee did, and will also have to be interviewed for proper fit for the franchise itself
  • The ability to levy additional costs: there will often be a transfer fee that will be paid directly to the franchisor simply for the “right” to transfer the franchise to someone else.  Additionally, the incoming buyer will likely have to go through the same (paid) training that the original franchisee did.

We urge our clients who are considering buying or selling a franchise business to be very familiar with the terms of the original FDD (franchise disclosure document) that everyone is subject to so there is no misunderstanding before starting down the road to a transaction.

What are the Pros?

There are lots of pros of buying into a franchise. With top tier franchises, you’re buying into something that has a well-established system. It’s so well-established that they’ve multiplied the system with strangers. There is an operations manual that you will not only be given, but thoroughly trained on.

You also have bought into something that has a strong brand presence. Customers know exactly what you provide within an established brand halo, and often have loyalty to the brand above and beyond their personal loyalties to ownership. This makes transitions simple.

You will also have the chance to meet other franchisees to see what improvements and changes you can make to take the business you are buying to the next level.

What are the Cons?

In addition to the vetting process listed above, the franchisor itself is, in a way, a direct competitor to the seller. The franchisor is always looking to sell more units and may be able to provide incentives and sweeteners to a deal for a new franchisee that someone who is just looking to sell/transfer his/her franchise to someone else can’t.  However, the overall mission of any franchise is to grow, and if a potential buyer looks like a solid and qualified possible franchisee, a healthy franchisor isn’t going to endanger bringing that buyer into the organization as a new franchisee.

There’s also a smaller buyer pool. We’ve said in previous articles that the bigger the buyer pool, the larger the number of possibilities. Because of the limits of creativity imposed in a franchise model, there are fewer people open to buying into them. But that may also be an opportunity for a buyer, as he/she will be competing with fewer people for the best franchise opportunities.

Looking to buy or sell a franchise business? We’ve been through those transactions hundreds of times. Let us put our expertise to work for you.

The 8 Components of the Sellability Score

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Eight ComponentsWe’ve reviewed John Warrilow’s book Built to Sell in our book club series and many of our case studies are taken from accounts shared on his Built to Sell podcast. In many of those interviews John goes over the same ground with business owners as they share their stories of building, growing, and exiting. Over time, John has developed a “sellability score” that we think captures some key metrics all potential sellers should take note of.

Financial performance

This metric is about your history of producing revenue and profit as well as how consistently and professionally your books have been prepared. In a certain sense, every business transaction starts here and it’s something we can never say enough about: pay your taxes and keep accurate financial records.

Growth Potential

If someone were to come into your business as a new owner, what rate of growth could he/she expect with regular effort? With nights + weekends effort? This can be gleaned not just from the trends your financials show, but products/services you have not yet implemented for various reasons. Could the business expand geographically? Could new customers be created from unused capacity?

Switzerland Structure

For Switzerland to have been neutral for centuries, it has had to learn to be very self-sufficient. Neutrality may keep you out of conflicts but sometimes it isolates you as well. So too with your business and dependence on a single customer. A general rule is that no more than 15% of your company’s revenue should come from a single customer. The more diversified your revenues are, the more attractive your business is to buyers.

Value Teeter-Totter

Can your business finance its growth from its own cash flow or does it need to rely on outside capital? A buyer will pay more for a company that has less need for outside financing, and will pay less for a company that has more need for it (hence the “teeter-totter”). Two quick ways to make adjustments here would be to reduce your collection times from your customers and increase your payment times to your vendors.  

Recurring Revenue

Do you have recurring revenue? Is it in the term of subscriptions or long-term contracts? What is your churn/cancel rate? The clearer your answers to these questions, the more a buyer can be assured of some “guaranteed” revenue.

Monopoly Control

How well are you differentiated from your competitors? The greater your competitive advantage, the likelier you are playing in a blue ocean, in which you define the rules your competitors play by. The more differentiated a business is, the more valuable it is to an acquirer.

Customer Satisfaction

In a previous article we discussed Fred Reichheld’s Net Promoter Score and how it could help you better understand how happy your customers are. In a certain sense, customer “satisfaction” is simply a baseline. You want them not just to be happy with what you’ve delivered, but happy enough to share your company with others.

Hub and Spoke

What does your management team look like? If you were incapacitated or unable to work for a period of weeks or months, how would your company perform? Employees that can be counted on are a major driver of confidence (and value) for potential buyers.

These factors are not a definitive list of key things a business owner should look at before considering a sale, but they are a very good list. And one that, if seriously attended to, will make a business incalculably better. Even if selling is not on the immediate horizon.  

Unhappy about how any of these components in your business at the moment? Give us a call so we can help you improve and get on the path to a possible exit.

4 Financial Ratios to Better Understand Your Business

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Financial RatiosSome business owners confine their working knowledge of finances to what’s in the bank today vs. what needs to be paid today. Others will give a quick glance at monthly financial statements their bookkeepers have given them. But the most savvy business owners take those financial statements and examine some simple financial ratios in order to keep tabs on and improve their small businesses. These ratios should be compared to industry standards. (Don’t worry, there won’t be a test at the end!)

Quick Ratio

Also known as the acid test, the quick ratio is a way to understand how much money you have to deal with your current liabilities. It’s calculated by taking your current assets (excluding inventory, which is not quickly convertible to cash) and dividing it by your current liabilities. 

A ratio of 1.0 is acceptable, but it means that you have only $1 of cash on hand to deal with each $1 of liabilities. Anything north of 1.0 means that you have at least a bit of cushion in case of a cash crunch.

Gross Profit Margin

This is often considered a “tell-all” metric and is something that should be monitored month-to-month and year-to-year as you want it to stay consistent. You calculate GPM by taking your gross profit (total revenues minus costs of goods sold – COGS) by your gross revenues.  

What the margin is will depend on what kind of business you have. If you are selling a premium product, you typically see a higher margin, whereas if you are competing on cost, a low margin is more likely. As we said, it’s a number that should stay consistent so if your margin goes down it could indicate:

  • Your costs have increased but you have not increased pricing to match
  • You have a problem with shrinkage/unauthorized free giveaways

Net Profit Margin

This is a more granular version of the Gross Profit calculation. In the numerator, you will take total revenue and subtract COGS, but this time also take out operating expenses to arrive at net profit. Divide that by total revenue and you get your net profit margin.  

If you’re unhappy with the number, there are a few remedies:

  • Raise prices
  • Decrease COGS
  • Review your operating costs. Can you improve business productivity?
  • Analyze your sales mix – is it diversified enough?

Average Customer Sale 

If the previous three ratios examined your business at a macro level, this ratio examines it on a micro level by looking at each transaction with a customer. It is calculated by taking the total amount of sales divided by your number of customers. This number will allow you to identify what each customer is spending with you, on average. If this number is much lower than you expect, then there might be missed opportunities for add-on sales or associated products/services at the point of sale. If it’s much higher than you expect, it’s a great opportunity for you to see what is going right and lean into it!

There are a select group of people who live for numbers, but we know that most business owners don’t. If you need some help with these ratios, give us a call so we can help you better understand your business!