In our experience, your age has a big effect on your attitude towards your business and how you feel about one day getting out. Here’s what we have found:

Business owners between 25 and 46 years old

Twenty- and thirty-something business owners grew up in an age where job security did not exist. They watched as their parents got downsized or packaged off into early retirement, and that caused a somewhat jaded attitude towards the role of a business in society. Business owners in their 20’s and 30’s generally see their companies as means to an end and most expect to sell in the next five to ten years. Similar to their employed classmates who have a new job every three to five years; business owners in this age group often expect to start a few companies in their lifetime.

Business owners between 47 and 65 years old

Baby Boomers came of age in a time where the social contract between company and employee was sacrosanct. An employee agreed to be loyal to the company, and in return, the company agreed to provide a decent living and a pension for a few golden years.

Many of the business owners we speak with in this generation think of their company as more than a profit center. They see their business as part of a community and, by extension, themselves as a community leader. To many boomers, the idea of selling their company feels like selling out their employees and their community, which is why so many CEO’s in their fifties and sixties are torn. They know they need to sell to fund their retirement, but they agonize over where that will leave their loyal employees.

Business owners who are 65+

Older business owners grew up in a time when hobbies were impractical or discouraged. You went to work while your wife tended to the kids (today, more than half of businesses are started by women, but those were different times), you ate dinner, you watched the news and you went to bed.

With few hobbies and nothing other than work to define them, business owners in their late sixties, seventies and eighties feel lost without their business, which is why so many refuse to sell or experience depression after they do.

Of course, there will always be exceptions to general rules of thumb but we have found that – more than your industry, nationality, marital status or educational background – your birth certificate defines your exit plan.

No matter what your age, building a business that you can sell someday makes good business sense.

Doctors in the developing world measure their progress not by the aggregate number of children who die in childbirth but by the infant mortality rate, a ratio of the number of births to deaths.

Similarly, 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.

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. Better than the blunt measuring stick of an aggregate number, a ratio expresses the relationship between two numbers, which gives them their power.

If you’re planning to sell your company one day, here’s a list of seven 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 175–250 square feet of usable office space per employee.

2. Ratio of promoters and detractors

Fred Reichheld and his colleagues at 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 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 and 15 percent. According to Satmetrix’s 2011 study, the U.S. companies with the highest Net Promoter Score are:

USAA Banking 87%
Trader Joe’s 82%
Wegmans 78%
USAA Homeowner’s Insurance 78%
Costco 77%
USAA Auto Insurance 73%
Apple 72%
Publix 72%
Amazon.com 70%
Kohl’s 70%

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.

Specialty food retailer Trader Joe’s ranks among companies with the highest sales per square foot; Business Week estimates it at $1,750 – more than double that of Whole Foods.

4. Revenue per employee

Payroll is the number-one expense of most businesses, which explains why maximizing your revenue per employee can translate quickly to the bottom line. In a 2010 report, Business Insider estimated that Craigslist enjoys one of the highest revenue-per-employee ratios, at $3,300,000 per employee, followed by Google at $1,190,000 per bum in a seat. Amazon was at $1,010,000, Facebook at $920,000, and eBay rounded out the top five at $530,000. 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 (slowing sales, 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? Dr. Karl Blanks and Ben Jesson are the cofounders of Conversion Rate Experts, which advises companies like Google, Apple and Sony how to convert more of their website traffic into customers. Dr. Blanks and Mr. Jesson state that there is no such thing as a typical opt-in rate, because so much depends on the source of traffic. They recommend that rather than benchmarking yourself against a competitor, you benchmark against yourself by carrying out tests to beat your site’s current opt-in rate.

Dr. Blanks and Mr. Jesson suggest the easiest way of increasing opt-in rate is to 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. Using this technique and a few others, Conversion Rate Experts achieved a 66 percent increase in the prospects-per-visitor rate for SOS Worldwide, a broker of office space.

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.

Conversion Rate Experts’ Dr. Blanks and Mr. Jesson recommend you monitor the rate at which you are converting qualified prospects into customers, and then carry out tests to identify factors that improve that ratio. Conversion Rate Experts more than doubled the revenues of SEOBook.com, the leading community for search marketers, by converting many of SEOBook’s free subscribers into customers. Techniques that were found to be effective included (perhaps counter intuitively) restricting the number of places available; allowing easier comparison between SEOBook and the alternatives; communicating the company’s value proposition more effectively; and simplifying its sign-up process. 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

This is the first of a four-part series that will provide you with some food for thought,

There are many things you can do to make your business worth more—sort of like painting a house before you sell it. However, what we will cover here are longer-term fixes rather than quick fix-ups. The reason: Facades usually have limited value, and sophisticated buyers can see through them.

Consider this one truism: If your record keeping is done well, it becomes an ASSET of the business. What does that mean? Well, you generally either use assets or create them for sale; but does that apply to business records? The simple truth…YES.

Business records are an asset because they have value. Not the paper or computer data itself, but the mere ACCURATE RECORDKEEPING you maintain will add to the value of your business. If that is the case, then you should look at record keeping as an investment – not a cost.

Consider this, and it may shock you, but if you had your corporate books audited for three to five years BEFORE you sold the business, that alone could increase the consideration (money) paid to you as much as what you earn in a full year. So, if you make $500,000 per year, by just auditing what you already do as part of the business operations, you may add $500K to your pocket.

How many units sold or hours of services would your business have to sell in order for YOU to get an extra $500K in TAKE HOME pay?

In a business, most business owners will keep their records as simple as possible. Some I have dealt with over the years actually maintain very detailed and structured books. Regardless, the numbers you collect are a picture of effectively managing your business. They should not be viewed as a task that has no rewards.

The information you collect should satisfy two key criteria – financial and operational information. If done properly, and the systems you use allow for it, you can “kill two birds with one stone.” For example, recording an order and subsequent sale of a product or service should provide for both needs.

The financial information allows you to understand issues which are central to the financial well-being of your company. The lifeblood of a company must be reflected on its Balance Sheet. The Balance Sheet SHOULD reflect what you own, what you owe, and how much you are “technically worth.” What does “technically worth” even mean? Your Balance Sheet is the most important financial document you can produce, and it reflects values recorded AT COST. So, if you buy a widget, it gets recorded at cost. If the widget is still in stock a year from now, it may not reflect the current market value of the product. True market value is not reflected in your records, except if you have taken an allowance for things such as an inventory write-down.

Years ago, the cost of computer memory was so volatile, that accurate record keeping of value was near impossible because of fluctuations in what sometimes seemed hour to hour. When goods you own can be subject to incredible swings in value in short periods of time, special accounting must allow for that, and invariably, those allowances will show up on your Balance Sheet.

Keeping records accurate and up-to-date is a joint responsibility of you and your accountant. Many business owners rarely analyze their Balance Sheet, as they spend more time looking at the income statement and how much money is in the bank. However, your accountant should assist you to ensure that the numbers on the Balance Sheet are accurate and the process of recording the data is effective and timely.

You have three choices in an accountants review: compilations, reviews, and audits. Audits are not to be confused with a dreaded IRS review, but simply a review of the financial recording methods and data accuracy in conformity to Generally Accepted Accounting Principles (or GAAP as it is known). It involves a number of key areas including accurate income and cost reflection to a particular date, sample validation of external unverified data (i.e., your outstanding A/R and A/P), and an evaluation of data recording processes (i.e., inventory recording and counts). It is a long process and can seem daunting, but if you are prepared for it, it is not a cost, but rather an investment in a 1X yearly earnings return.

Most sophisticated buyers WILL PAY additional value for audited returns. The reason is that they can rely on the information with a greater degree of certainty. Being able to rely on that information will be beneficial to a buyer because it will save them time during due diligence, possibly allow them to get better rates on debt acquired, and reduce the risk of loss.

So, if getting an audit could lead to a 1X multiple addition, what will you get with a review or a compilation? A review is, for simplicity purposes, a mid-ground that provides a less stringent review. Your accountant will not do external validation, nor ensure proper methods in inventory counts, but they will look at your entries, make appropriate accruals, and ensure that certain accounting standards are being followed. Yet, they will NOT certify your Balance Sheet.

With a compilation, your accountant will not attempt to verify anything, and will simply present the data you provide in an acceptable financial format. As you are most likely already aware, a compilation and review are less costly—significantly in some cases. Yet, how much will your price suffer if you were to get compilations or reviews?

Compilations will not allow for any added value. In fact, it may be viewed as a negative and cause buyers to not even consider an otherwise good business. With a review, you have a much better chance of a sale, but the likely “premium” will be between 0% and 20%. The marginal difference vs. an audit is large and makes you wonder why you have not done this before.

If you do have an audit, try having at least three years of audits. If your business is saleable, the cost of an audit will almost certainly be recouped during a sale. Preparing for an audit by updating your data collection, recording methodologies and internal review will also have the secondary benefit that improves your operation and, by extension, your bottom line. So, not only will you make more when you sell your business, but you will gain better intelligence about your business and also earn more money each year until it is sold.

Consider updating your financial recording and audit possibilities. A certified or qualified intermediary can help you prepare for that eventual sale date. Working also with your accountant, your “team” may help you, as a shareholder or member, to achieve an even better return than you thought ever possible. Remember, defending your company’s value is critical in the end. Use the 4 areas worth improvement to improve your payout.

Need assistance with mergers and acquisitions? Our New Jersey, Pennsylvania, and Washington, D.C. offices are here to help – no matter where you are located. Call 800-419-5754 to experience the Calder difference today!