Powerful Ratios to Start Tracking Before You Sell Your Business
Baseball’s leadoff batters measure their “on-base percentage” – the number of times they get on base as a percentage of the number of times they get the chance to try. Businesses utilize their debt-to-equity as a leveraging ratio. Acquirers also like tracking ratios and the more ratios you can provide a potential buyer, the more comfortable they will get with the idea of buying your business. If you’re planning to sell your company one day, below is a list of ratios to start tracking in your business now.
1. Employees per square foot
By calculating the number of square feet of office space you rent and dividing it by the number of employees you have, you can judge how efficiently you have designed your space. Commercial real estate agents use a general rule of 150–200 square feet of usable office space per employee.
2. Ratio of promoters and detractors
Bain & Company and Satmetrix developed the Net Promoter Score® methodology, which is based around asking customers a single question that is predictive of both repurchase and referral. Here’s how it works: survey your customers and ask them the question “On a scale of 0 to 10, how likely are you to recommend (insert your company name) to a friend or colleague?” Figure out what percentage of the people surveyed give you a 9 or 10 and label that your ratio of “promoters”. Calculate your ratio of detractors by figuring out the percentage of people surveyed who gave you a 0–6 score. Then calculate your Net Promoter Score by subtracting your percentage of detractors from your percentage of promoters. The average company in the United States has a Net Promoter Score of between 10-15%.
3. Sales per square foot
By measuring your annual sales per square foot, you can get a sense of how efficiently you are translating your real estate into sales. Most industry associations have a benchmark. For example, annual sales per square foot for a respectable retailer might be $300. With real estate usually ranking just behind payroll as a business’s largest expenses, the more sales you can generate per square foot of real estate, the more profitable you are likely to be.
4. Revenue per employee
Payroll is the number-one expense for most businesses, which explains why maximizing your revenue per employee can translate quickly to the bottom line. In a 2017 report, Business Insider analyzed technology companies. Apple enjoys one of the highest revenue-per-employee ratios, at $1,859,000 per employee, followed by Facebook at $1,621,000 and Google at $1,253,000. The benchmark for this ratio can vastly change depending on the industry of your business. More traditional people-dependent companies may struggle to surpass $100,000 per employee.
5. Customers per account manager
How many customers do you ask your account managers to manage? Finding a balance can be tricky. Some bankers are forced to juggle more than 400 accounts and therefore do not know each of their customers, whereas some high-end wealth managers may have just 50 clients to stay in contact with. It’s hard to say what the right ratio is because it is so highly dependent on your industry. Slowly increase your ratio of customers per account manager until you see the first signs of deterioration, such as slowing sales or a drop in customer satisfaction. That’s when you know you have probably pushed it a little too far.
6. Prospects per visitor
What proportion of your website’s visitors “opt in” by giving you permission to e-mail them in the future? There is no such thing as a typical opt-in rate, because so much depends on the source of traffic. The key is rather than benchmarking yourself against a competitor, you benchmark against yourself by carrying out tests to beat your site’s current opt-in rate. You could reward visitors for submitting their e-mail addresses by offering them a gift they’d find valuable. Information products – such as online white papers, videos and calculators – make ideal gifts, because their cost per unit can be almost zero.
7. Prospects to customers
Similar to prospects per visitor, another metric to keep an eye on is the efficiency with which you convert prospects – people who have opted in or expressed an interest in what you sell – into customers.You should monitor the rate at which you are converting qualified prospects into customers, and then carry out tests to identify factors that improve that ratio. The trick is to establish your benchmark and tinker until you can improve it.
Acquirers have a healthy appetite for data. The more data you can give them – in the ratio format they’re used to examining – the more attractive your business will be in their eyes. Learn more about Anders Business Transition Planning Services, or contact an advisor to discuss how we can help your business become more marketable.