Time to Sell Your Business? You'll Need Metrics. Your enthusiasm for what you've built will get buyers excited but they'll need numbers too.
By Mark Daoust Edited by Dan Bova
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"What are your numbers?" If you have ever watched an episode of Shark Tank, you will recall how harshly the investors treat the business owners who don't "know their numbers." The investors grill their entrepreneurs and expect them to be sharp and intelligent enough to communicate the details of their business effectively. And if they don't, they are sent away with not only a failed investment opportunity, but also a hefty dose of shame, humiliation and mental anguish.
Though the entrepreneurs aren't in the tank to sell their businesses -- they are looking for an investment -- wherever money is exchanged, the people shelling it out will want to know the metrics on how that money circulates.
Related: 5 Ways to Win Your Pitch, According to 'Shark Tank's' Robert Herjavec
Similar to the shark investors, if you want to sell your business, buyers will want to know your numbers, or metrics, to ensure their investment is as low-risk as possible. Supplying your buyers with valid, detailed metrics will not only keep the acquisition moving forward, but also fuel a more positive and seamless acquisition experience.
Metrics are essential because buyers are naturally skeptical.
Regardless of what business you run, knowing your metrics is paramount to selling. Buyers don't care how much you think your business is worth or what you imagine its future trajectory will look like. They want to see the real numbers.
Buyers come to the table skeptical. They don't expect to lose their investment when they buy your business, but they won't feel confident until they take a peek behind your data-lined curtain. To feel assured that they are making a safe, low-risk investment, they will want to see how well your business is doing (aka the metrics).
It also doesn't matter the size of the acquisition, buyers will enter the process wanting to know how well your business performed, whether it is a six-figure or nine-figure business. They need the hard data to give them enough confidence to pull the trigger.
Buyers want to know: Is your business sustainable?
Buyers need to know that your revenue will be sustainable, and it has the potential to grow long after the acquisition. They are looking for a return on investment that continues year after year. The only way you can answer this question is by showing them with your metrics.
To predict future growth and sustainability, buyers will also look to past growth and trends. They will want to examine metrics such as gross margin, website traffic, revenue growth and customer metrics such as acquisition costs and lifetime value -- and the history associated with each.
They will want to review the metric trends and patterns from the last few years and use this data to weigh their risk. For example, instead of just requesting a blanket customer acquisition cost, buyers will want to see if these costs are consistent and whether you have experienced any surges. If you acquire customers from Facebook and Google, know your customer acquisition costs from each channel not only from Day 0, but also day 30, 60 and 90. Though this is only applicable to subscription-based businesses, the point is that buyers like to see trends and patterns in the data, regardless of what metrics they are reviewing. Positive trends signal to them their investment is safer, your business is robust, and there is a higher potential for the business to continue its positive course in the future. As a result, they will feel more at ease to move forward with the acquisition.
Related: Expert Advice to Help You Prepare to Sell Your Business
The most valuable metrics to buyers.
Though there are numerous metrics attractive to potential buyers, all businesses should be closely tracking revenue, gross margin, customer lifetime value and customer acquisition cost.
The metrics you track, however, should closely pertain to your specific business model. For example, if you are selling an internet business or you have an active website that generates leads and sales, additional metrics buyers will want to track are traffic and conversions, since both are directly tied to revenue. Buyers want to see steady increases in website traffic, but more than that, they want to know what percentage of the revenue comes solely from your traffic. Conversion rates are also important as low rates can signal poor traffic and/or targeting misalignment.
If you have a recurring or subscription-based business model, you also want to track how long it takes for customers to reach their lifetime value since this directly impacts cash flow. If your customer's lifetime value is $1,000, what is the lifespan of that dollar amount? Did it take three months, six months or one year? Did a larger percentage of the money come in the latter part of the subscription due to subscription upgrades? Knowing these details will help you define exactly how much you can spend on acquiring a customer. Buyers will want to see these numbers as well and will weigh them physically and mentally to assess what level of risk they are comfortable taking on.
The customer lifetime value metric is one that is miscalculated often, even by the largest companies. I recently had a conversation with Babak Azad, former senior vice-president of Beachbody and current founder of Round Two Partners, about his experience in acquisitions. Azad frequently advises clients on how to position themselves for a successful exit and focuses heavily on the need to tighten up metrics. According to Azad, even nine-figure businesses have leaks in their lifetime value calculations and tightening these up is vital.
Related: 10 Ways to Make Your Company More Attractive to Investors
A way to drive an acquisition forward with concrete metrics for lifetime value is to focus on paid media metrics. Paid media is more controllable than strategies like search engine optimization or influencer marketing, which are unpredictable at best. Concrete metrics like these will allow you to more effectively calculate your customer acquisition costs, lifetime value and consequently your profit margins.
Know your metrics.
Buyers are savvy and they want to know their investment will be protected. Know your numbers, analyze the trends, and document your results. As long as you are prepared, you will tip the scales in favor of a successful acquisition process.
