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Benchmarks – How Your Business Measures Up!
Benchmarks can help a business owner look at the vital signs of his or her business and compare them to similar businesses. Benchmarks can be expressed as a percentage of sales: for example, a business’s rent is 12 percent of annual sales, but the industry average is eight percent. The rent is pretty much a fixed expense, so there isn’t much a business owner can do about it. However, it might pay to point out to the landlord that the average rent for this type of business is considerably less than what he or she is charging. Benchmarks can also be expressed as sales per employee, sales per square foot of floor space, etc. Most business owners can calculate their own figures by using common math, but finding comparable data may not be quite as easy.
A good source of benchmarks is BizStats at www.bizstats.com – an excellent site. Most libraries will also have business guides that can help. Many banks will have benchmark data in their commercial lending departments. Dun & Bradstreet is another source for benchmark data, as are industry associations. Business brokerage firms also may have benchmark data that could be helpful.
Here are the most common benchmarks used when comparing businesses(expressed as a percentage of annual sales) are: Cost of Goods Sold, Payroll/Labor Costs, Occupancy Cost, Profit (estimated)
Another important benchmark is based on employee productivity. For example, an AAMCO Transmission business should generate $3,500 to $4,000 per technical employee per week. If one is comparing one AAMCO shop with another, this can be an important benchmark. It would also be an important benchmark if one owned any type of transmission business. Here are some benchmarks for some well-known business types:
Source: BizStats (www.bizstats.com)
Note: The figures include both full-time and part-time employees and do not indicate what they earn, but rather the sales they generate in a given year.
In addition to the above examples, BizStats contains many other benchmarks. Revenue per employee can be used to:
1. Check how a business stacks up against its peers, and
2. Provide an excellent way to see how the business can be improved – a valuable tool.
If, for example, the business doesn’t stack up very well with the benchmarks, then an owner may want to see how he or she can increase sales and profits.
The following sampling also provides some rough rules of thumb for employee productivity benchmarking purposes. The number of employees includes both full-time and part-time employees.
Source: BizStats (www.bizstats.com)
Benchmarking allows one to look at a business from an entirely different viewpoint. By using these tools, business owners can not only see how his or her business compares to similar ones, but will also be arming themselves with a good measuring stick for assessing where the business needs improvement.
Difficulties in Pricing Businesses
One of the major problems in pricing businesses, especially small ones, is the record- keeping of the owner. Most owners are “chief cook and bottle-washer.” Maintaining the financial records is not necessarily high on his or her list. In many cases, the bills and receipts are tossed in an envelope and periodically dumped on a bookkeeper’s or accountant’s desk. From these documents, along with computer (or cash register) print-outs of sales, the accountant prepares tax returns, and, in some cases, monthly or quarterly income statements. The rub in all this is that the accountant can work with only what the seller provides. Small business owners are usually so busy running the day-to-day operations that they fail to spend the necessary time on the financial affairs of their business.
The sale of a business is usually “event driven.” In other words, it is generally a specific event that forces, or, at least, pushes an owner into selling. Very few business owners actually sit down to consider selling and all that it entails. The event occurs; the seller calls his local business broker and announces that he or she now needs to sell. They want to know what it will sell for. The business broker says that before a price can be suggested, he or she will need to see the financial records. The seller scurries to his accountant and says that he needs his current profit and loss statements and the last three years’ tax returns. The accountant promptly faints! When she wakes up, she tells the client that it will take a lot of time to go through the bag of receipts and bills.
When the financials are finally prepared or the tax returns given to the business broker, one thing is readily seen – the financial records or tax returns reveal that the business has not made much money over the years. After all, tax returns are not prepared to show a business in its best light. Noone, including the small business owner, wants to pay any more taxes that he or she has to. The focus shifts now that the decision to sell has been made.
Business brokers are very good at recasting or normalizing the financial statements or tax returns. They add back such items as depreciation, owner benefits, etc., and arrive at the “real cash flow” of the business. This number is used to arrive at a recommended or suggested selling price. For anyone selling a business, using the services of a business broker professional can make the difference between a successful sale and “giving away the store.”
Selling a Business – How Long Does It Take?
A recent survey revealed the following about the length of time that selling a business requires:
Average time from putting the business on the market to time of sale:
It took from four to 12 months to sell approximately 82 percent of businesses, with 38 percent falling into the seven- to nine-month range. Certainly some businesses sell more quickly, but at the other end of the spectrum, over eight percent are on the market for over 12 months.
Why does it take so long to sell a business? Price and terms are the biggest reasons. Not over pricing the business at the beginning of the sales process is a big plus, as well as a transaction structured to include a reasonable down payment with the seller carrying the balance. Having all of the necessary information right from the beginning can also greatly reduce the time period. Being prepared for the information a buyer may want to review or having the answers available for the questions a buyer may want answered is the key.
Here is the basic information that a prospective acquirer will want to review:
- Copies of the financials for the past three years.
- A copy of the lease and any assignments of the lease from previous sales.
- A list of the fixtures and equipment that will be included in the sale. Note: If something is not included, it is best to remove it prior to the sale or at least have a list of items not included.
- A copy of the franchise agreement if applicable or any agreements with suppliers or vendors.
- Copies of any other documentation pertaining to the business.
- Supporting documents for patents, copyrights, trademarks, etc.
- Sales brochures, press releases, advertisements, menus or other sales materials.
In addition, here are some of the questions that buyers may have. A prepared seller should have ready answers as well as the information to support them.
- Is the seller willing to train a new owner at no charge?
- Are there any zoning or local restrictions that would impact the business?
- Is there any pending litigation?
- Are any license issues involved?
- Are there any federal or state requirements, or environmental OSHA issues that could affect the business?
- What about the employee situation? Are there key employees?
- Are there any copyrights, secret recipes, mailing lists, etc?
- What about major suppliers or vendors?
Small businesses are usually financed over 5 to 10 years. Debt service (the amount owed by the buyer to the seller) generally does not exceed 25 to 30 percent of the annual cash flow. The remaining balance is for the buyer’s personal cash requirements. The numbers have to make sense – for both parties.
A prepared seller is a willing seller and having the answers to the above questions can significantly reduce the time it takes to sell a business. Using the services of a professional business broker can also greatly reduce the time period. They are knowledgeable about the current market, how to market a business and they can advise a seller on price and terms. They can also recommend professional advisors, if a seller doesn’t have them already. Using advisors who are transaction-experienced can also shorten the time it takes to close the sale.
Gross Square Foot
Another common benchmark is Sales per Gross Square Foot. Here are examples from some large restaurant franchises and chains. It provides a guideline of what these popular restaurants do. They can be compared to similar businesses to see how they stack up with these successful operations.
Here is an anecdote that is as accurate as it is old . . .
A Greek restaurant owner had his own bookkeeping system. He kept his accounts payable in a cigar box on the left-hand side of his cash register, his daily cash returns in the cash drawer of the register, and his receipts for paid bills in a shoe box on the right side of the cash register. When his youngest son graduated as a CPA, he was appalled by his father’s primitive bookkeeping methods. “I don’t know how you can run a business that way,” he said. “How do you know what your profit is?”
“Well, son,” the father replied, “when I got off the boat from the old country, I had nothing but the clothes on my back. Today, your brother is a doctor. Your sister is a speech therapist, and you’re a CPA. Your mother and I have a nice car, a city house, a country house, and plenty of money for retirement. We have a good business and everything is paid for. Add all that together, subtract the ‘clothes on my back,’ and there is your profit.”
©2004 BBP – This newsletter is not intended to render accounting, legal or other professional service; the publisher and sponsors assume no liability for a reader’s use of the information herein.©Copyright 2004 Business Brokerage Press