The easiest method for a buyer or potential successor to analyse different businesses is by using benchmark performance comparisons. Benchmarking is also a simple way for you to see how your business performance compares against others in the industry, or more importantly, other businesses vying for the same customer. Benchmarking therefore can play an important role when preparing your Effective Succession Plan, not only enabling direct comparisons, but also to highlight to you areas for improvement prior to your succession event.
There are numerous benchmarking standards available for any industry. The key to successfully using benchmarks is to identify those that are particularly relevant to your business and to what you are trying to achieve. In planning for succession, the key benchmarks are considered to be Growth, Productivity, Profitability and Liquidity, all of which are important in their own right, but are also interlinked. Uncontrolled or unplanned growth may lead to unproductive or unprofitable work. High levels of liquidity may indicate that the assets of the business are being retained in unproductive asset classes. Conversely low levels of liquidity may limit or restrict growth opportunities as they present.
Case Study
Consider the following scenario faced by clients who were looking to purchase an advice based business. Not owning their own business previously, they had sought advice to assist them in completing a due diligence on three businesses they had shortlisted. All three businesses had similar sized client registers and were asking similar prices, but when further analysis of the businesses was completed, they were amazed by how different they actually were. The results were summarised as follows:
The report identified the following issues:
Business A
The owner was already semi-retired spending only three days a week on the business. It was a well established register which had no proactive client management over the last two years, as the owner was happy with letting it run its’ course, only drawing a minimal wage to support his golfing habit.
Business B
The current owners, an older husband and wife team, were struggling to keep their heads above water. They hadn’t adequately prepared for the industries additional compliance requirements, thinking they could do it all themselves without any additional staff, and so were always busy, but not always spending their time on income generating activities. Unfortunately work pressures impacted on their personal relationship and the business sale was as a result of their divorce.
Business C
A reasonably new business with two young, driven owners looking to build a business from scratch and drawing out the maximum the business could afford for their efforts. Unfortunately there had been a dispute between the partners due to a feeling that the workloads were disproportionately split, with one partner claiming to have been working 65+ hours per week.
The ability of the purchasers to use this benchmark information, greatly assisted their decision making process – but we are not going to tell you which one they picked!
For more information contact your Altitude Business Consultant.
