Heritage Advisor: The numbers that matter in purchases

There are literally hundreds of internal metrics and reports that people use to measure their business, and many of them can be useful. But unfortunately, most of them rely on historical data that may not be very current or even relevant to changing markets.

Looking at past data is certainly important. But when evaluating a business, I do my best to look to the future. To that end, I think there are only five internal reports that really matter, which are listed below.

A few thoughts on this metric:

  • A lot of people like to dig into previous financial reports and pick out obscure metrics like “defect density” or “operational efficiency ratios” and that’s great and says a lot about how well your target is run and whether they have systems in place that can handle it. Produce these numbers reliably. If you find a similar target, you will be impressed. Most of the small and medium sized companies I work with are not that advanced.
  • Industries also matter. While I feel the metrics I’ve mentioned below are relevant for all industries, there are certain metrics that are important depending on your target industry. For example, I like to evaluate retail stores by daily customer traffic and sales per customer. I like to see project overdraft trends for construction firms. I also want to look at the realization of client-facing employees (billable and non-billable time) in service firms.
  • These metrics all assume that you are buying the entire company with the intention of continuing to operate it as a going concern. If a company’s value is in its assets, such as inventory, equipment, or customer lists, then this metric may not be entirely applicable because your goals are different.

Value is not necessarily a multiple of sales, profit or cash flow, and I believe companies that rely solely on these metrics are potentially misleading themselves. There is other data that is just as useful, and data that gives the buyer access to future trends is, in my opinion, the most important.

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