How well is your company doing compared to your peers? Are you in the top 5 percent? If so, your company might be worth more than others. Think about this as you would for a real estate sale. Your real estate agent (or software like Zillow) uses comparables to determine your house’s worth. Comparables that are in the same ballpark as your house will be used to establish the relative price for your house. In business sales, it’s similar (although it’s tougher to get the comparables).
You can use those results to set target goals for your business going forward. Ideally, you will know how you compare to industry standards (average, best, worst) for revenue, gross profit margin, EBITDA or SDE and other key measures.
Example: If you find out that your gross profit margin for commercial maintenance work is 35 percent with low levels of enhancements, you will know that you are in the bottom third of comparable companies. Hopefully, you’ve figured out your position and can use the next three to five years to correct that trend. Or you may decide you don’t care, you want/need to sell now and you’ll take the best offer you can get, but you will know that it will be lower than it might otherwise have been.
Measuring how well your company does compared to others using benchmarks is a proven way to check the strengths and weaknesses of your business plan and company performance. It’s especially helpful to use the benchmarking data for your region and type of company. Once you have the value drivers for your business identified and goals set from those benchmarks, you can use a dashboard to track how well you are doing compared to plan. This emphasizes the importance of always being on top of your financial results.
Think you are doing better than anyone else in your region for your revenue size? Have you measured it? How do you compare to your competitors in terms of strength of management, fleet and equipment and efficiency of labor? Benchmarks do exist for these measures, even for smaller companies, and we recommend you apply them to your business.
Big Fish in a Little Pond
If you beat all the benchmarks in the industry, will you get top dollar for your business? Not necessarily. If you are the “big fish in a little pond” located in an out of the way area, there may not be a buyer standing ready to buy the business. There are a lot of factors that go into these transactions before we get to the finish line. On the other hand, if you are a good-sized company in a highly desirable area, with strong profit margins and average-looking benchmark comparable, you may have interested buyers before you “fix” your benchmarks that are less than ideal. Be aware there are multiple variables that will come into play for each situation.
If you’d like to further discuss what your situation might be, please feel free to reach out for an initial conversation. We can help you determine your readiness for sale, selling, or buying a company, or help with an existing acquisition. In the meantime, if you have questions or comments, I can be reached anytime via email: [email protected] or phone at: 224-688-8838. We’re here to help you Harvest Your Potential.