KPIs Every Business Owner Should Track

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KPIs Every Business Owner Should TrackWhile business owners can be tempted to keep their eyes on every aspect of their businesses, there are a few key performance indicators (KPIs) that are the most important to know. In this article, we’ve collected those key KPIs and the reasons they should matter to those who want their business not just to survive in 2021, but to thrive.

Financial Statements

Most business owners know the health of their business by gut feel. Ask them any time, any place, and they can often give you answers that are scarily close to the actual numbers. But great businesses aren’t built on gut feel. You need to know your numbers, and you need to know them regularly.

Now we aren’t just talking about financial ratios (though you should know them too), but you should be measuring and tweaking:

  • Inventory turnover
  • Customer lifetime value (LTV)
  • Revenue per service/product

If you know these KPIs, you can improve your effectiveness, productivity, and cost savings in each area. You’ll also be in a better position to make the decision to stop selling a product/service (or put more money into a product/service) since you’ve been closely monitoring its performance.

Marketing

There are so many ways to effectively track the ROI of your marketing efforts. Armed with this information, you can find out what your customer acquisition cost (CAC) is and if you’re happy with it. While we might always like lower CACs, sometimes the market dictates that we are paying “about right” to get new customers.  

Apart from knowing your CAC you should know key metrics from whatever analytics you have installed on your website, including:

  • Mobile (what percentage of your customers access your site on mobile vs desktop)
  • Channels (how are you getting your traffic)
  • Navigation (what path does the customer take on your website)
  • Site speed (how fast are your pages loading)

You don’t need to know the exact statistics here, but you need to know the trends and how to address challenges. For example, if your site speed is slow, you need to get with your tech team and address that. You know from your own experience, but statistics also affirm that if a website doesn’t load within three seconds, more than half of potential customers will hit the back button or move on. These same principles apply to whatever reports are available to you on social media platforms apart from the engagement that you can measure on the surface via likes, shares, retweets, etc.

Human Capital

We’ve seen a great migration kicked off by the dawn of widespread remote work. That migration is still ongoing and it’s changing the dynamics of workplaces everywhere. The KPIs of the past were “attendance” and “productivity” and while those have their places, they are really lagging indicators. Better KPIs would be:

  • Engagement – how tied are your team members to the mission of the business?
  • Happiness – do your team members feel valued?
  • Drive – do your team members seek to move forward or grow with the company?

A business owner should know the answers to these KPIs for at least all of his/her direct reports. Businesses run on people, and those people can’t be an afterthought.

Customer Satisfaction

There are a plethora of tools available today to find out how your customers feel about their experience with your brand. There are online reviews across various platforms, comments on social media, surveys via email, and feedback from phone calls, just to name a few. The information you learn from these KPIs can help you determine the health of your business and which way you need to steer it. They can also alert you to blind spots in your product manufacture or service delivery.

Characteristics of KPIs

You can drown yourself and your team in KPIs if you want to: we don’t think that’s a good plan. KPIs should be:

  • Actionable (now that we have this data, we can do something to improve our performance)
  • Evolving (changes in the marketplace or business situation can force us to change expectations)
  • Simple (don’t make someone jump through hoops to provide relevant data)
  • Limited in Number (focus on a few key things instead of all of the things)

Feeling unsure what to do about some of the KPIs you’re unhappy about in your business? Give us a call!  We happen to know some great people who can help.

How to Find a Business Broker

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How to find a business broker.Whether last year caused changes in your life, or you’ve resolved to take an entirely different direction this year (or both), buying or selling a business is one of the most important decisions anyone can make.  The successful outcome of these possible transactions will be due in large part to your choice of business broker.  In this article we will talk about how to find a business broker in 2021 (and beyond) to help you make the best choice for your future.

Must Haves

We’ve already said that buying or selling a business will be one of the most important decisions (financial and otherwise) of your life.  That means that hiring the right broker will either be the very first decision a buyer makes or the very last decision a seller makes.  We think there are three indispensable qualities all business brokers should have:

  1. Knowledge.  There’s so much knowledge that goes into being a broker.  Brokers understand the sale process and the worth of valuations, as well as how to properly market and price your business.  They have solid broker agreements that are simple to understand.  They may also have certifications that attest to what they know.  They understand the importance of confidentiality throughout the process and will explore tax and legal questions with you.
  2. Experience.  There is simply no substitute for experience.  Don’t be afraid to ask brokers how many years they have been in the industry and/or how many deals they have been part of.  Now, everyone has to start somewhere in their broker journey, so be willing to consider someone who has a lot of experience in your industry even though they may not have been brokers for decades and decades.
  3. Industry Knowledge.  While brokers work with an impressive variety of businesses, over time particular industries or business sizes become sweet spots for them.  Don’t be afraid to hold out for a broker, or broker team, who have the proven experience.  That experience will often lead to better outcomes for you.

Very Important

These next two qualities aren’t “deal breakers” but we consider them very important:

  • Connections.  There are going to be other people who are going to make this journey with you, bankers, accountants, attorneys, etc.  A broker with a lot of connections can help you find a missing resource of your transaction that you might not otherwise have obtained on your own.  Not everyone networks in the same way, but networking is indispensable for brokers, and also tells you a bit about how they conduct themselves.
  • Likeability/Compatibility with you.  You’re not going to marry your broker, but you should consider the realities of a 3-18 month relationship: you are going to be working together on a serious and intense project, involving highly personal issues, from the start of your transaction to the end.  If your initial meetings aren’t going well, that might be a sign to keep interviewing.  Do not discount the importance of getting along well with your broker: that relationship will keep you going through the challenges that will surely be ahead (as they are) on your business buying/selling journey.

Where to Look

The best place to start, obviously, is with the people you know.  Check with your CPA, attorney, business coach, etc. to see if they know anyone worth checking out.  Next, discreetly put out feelers in your social circle.  If nothing comes up within these inner circles, consider looking up some of the business brokerage/M&A firms in your local area.  Check for testimonials and reviews but also take note of some of the names of the principals and brokers and head over to LinkedIn.  Type in their names and see if you already have a personal connection (LinkedIn will show you if you do).

All throughout the process, remember that knowing where you want this journey to begin (or end) is an important landmark to help you find the right person.  Share those thoughts in any interview with a potential broker: the answers will be a helpful guide to the conversation.

Obviously we’ve got a team of talented people here for every type of business and personality.  Take a look at our team or give us a call today: we’d love to chat with you!

Case Study #47: Partner Remorse

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Partner Remorse

Tyler Jefcoat was a newly minted MBA when he started Care to Continue, a home healthcare service. He had had two grandparents who went through nursing home experiences that weren’t great, and he wanted to find a better solution. Care to Continue provided hourly in-home care, keeping these elderly clients in familiar surroundings.

Tyler had a passion for the industry, but didn’t have the finances to create a company. So he connected with a better-capitalized partner who was happy to let Tyler gain a 25% ownership share while Tyler ran the business.

Business Model

This type of home care is not usually covered by standard insurance, so customers paid out-of-pocket or out of the legacy LTC plans that did provide for this service. At the time he sold his share of the business the company was charging $22/hour to the patients and paying out $11/hour to his team of certified nursing assistants (CNAs). This particular industry was also undergoing legal questions as to whether the CNAs would be classified as 1099 or W-2. Tyler saw the advantage in using a professional employer organization (PEO) to help him manage these compliance issues and as the company grew, Care to Continue averaged around a 15-20% EBITDA on topline revenue.

Success and Failures

Tyler was dedicated to making sure that his team got paid every Friday, but since he didn’t establish firm (and consistent) guidelines on when clients should pay, at one point he found himself with $150,000 in receivables! He came up with a smart, frictionless solution. All existing clients were told that their rates wouldn’t change as long as there was a method of payment on file, be it an ACH order or a credit card. There was absolutely no churn and the negative cash flow and huge receivables backlog disappeared.

But on the other side, Tyler admits that there was some conflict that he avoided that should have happened with the silent partner. Some debts that the silent partner had put on the balance sheet strained cash flow and made it difficult to grow the company. Tyler’s rationalization at the time: we can scale our way out of these problems. Turns out that’s not a solution.

Seeking a Solution

Tyler had developed a relationship with an investor who had significant home health care experience and went back to his silent partner with an offer from this investor to buy out a significant part of his majority shares at roughly 5X EBITDA. But because Tyler had avoided conflict some years before he had no idea that this was not really about the money for the silent partner, but about the idea of “passive income” that he had nurtured. It was a hard “no.”

Tyler came out of the meeting dispirited and realized an outside investor wasn’t an option. Around the same time, Tyler wanted to fire someone who had become toxic in the organization (turnover had massively increased in her department when she took it over) but the silent partner read this as Tyler trying to leverage the situation: by firing a senior member of staff, Tyler’s bargaining position for a buyout would be better. While this was not Tyler’s intention, it was clear the situation as it was was no longer tenable.

The original operating agreement had made provision for a buyout along the lines of a ten-year note, but Tyler was willing to give up some of the valuation in order to shave that down to a five year note. That negotiation worked and he ended up getting 3.5-4X EBITDA for his 25% share. The silent partner ended up selling the business entirely some time into that agreement so Tyler got a lump sum (and some extra) when the company sold.

Takeaways

While Tyler was ultimately happy to have had an opportunity to build a business without having to put up any capital, he wishes that he had embraced conflict as a way to build a better business and get on the same page as his partner. Other important takeaways:

  • Consider having payment methods on file. More and more people are used to subscription model businesses and seeing regular payments come out of their accounts.
  • Be clear on your balance sheet. When putting together an operating agreement, make sure that partners don’t have an outsized ability to put debt into the business, even if they are the majority shareholders.
  • Talk it out. By talking about the future ahead of time as well as embracing conflict early in the process, Tyler could have saved himself a lot of time (and possibly earned more).

Are you thinking about selling a business but have a partner who doesn’t want to sell? We’ve seen many different ways of dealing with this positively. Give us a call and let us share some with you!

PPP: 2021 Edition

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PPP: 2021 EditionOne of the final acts of the outgoing administration in Washington was the signing of a bill that had $284B allocated for a second round of the Paycheck Protection Program (PPP).  The program is set to last until March 31, 2021 or when all the allocated funds have been assigned, whichever comes first.  The pool of those eligible for this round is significantly larger than last time, and in even better news for some, those who already received a first PPP loan and had it forgiven are eligible to receive a second one.  

Eligibility

First-time borrowers must have a business of under 500 employees, and that business must have been operating since February 15th, 2020 (and must still be operating).  Gross receipts in the first three quarters of 2020 must have been reduced by at least 25% from the corresponding quarters in 2019.  The loan amounts are capped at $10M.

Second-time borrowers must have a business under 300 employees, and must have used or allocated all of the funding they received under the first round of PPP.  Their loan amounts are capped at $2M.

How to Calculate

There are two ways to calculate your loan amount.  You can take either:

  • Average monthly payroll in 2019 or
  • Average monthly payroll in the year prior to the start of the loan

That number is then multiplied by 2.5 for most businesses, or 3.5 for hospitality businesses.  It’s just one of many boxes on a standard government form.

What Expenses are Eligible?

In round 1, the eligible expenses were narrowly defined: rent, mortgage interest, payroll, and utilities.  This round took account of several other costs:

  1. Property Damage.  If your business was the recipient of vandalism, looting, etc. that was not covered by insurance or other compensation, repairs are covered.
  2. Operations Expenditures.  If your business had to get new digital infrastructure to enable remote working, for example, such as software or cloud services, those costs are covered.
  3. Supplier costs.  If you had payments to suppliers whose products/services were essential to you at the time of payment (or are now), those payments are covered.
  4. Worker protection.  If you have had to make changes to your work environment, such as construction of barriers, expansion of the premises for social distancing needs, installation of filtration or ventilation systems, or ongoing costs like masks or gel, those costs are also covered.

Tax Implications

The forgiveness guidance given for the first round of loans is the same in this round, but with more explicit financial and tax guidance.  Points worth noting include:

  • The loans have a five year maturity, and are pegged to a 1% non adjustable, not compounding interest rate
  • No prepayment penalties may be levied by lenders
  • The covered period (the period in which the loan must be used in order to be considered forgivable) can be between 8-24 weeks, and can be chosen by the borrower

The SBA has a tool to help you find a lender in your area (as well as a PDF defending themselves from accusations of abuse from the first round of PPP).  There are even some nonbank lenders getting in on this, including Square (known for its point-of-sale and credit card processing business) and Fintech player Kabbage.

Clarification was also given that PPP forgiven funds would not be taxed as income, and any normally-deductible expenses paid for by PPP funds would remain deductible.

Should You Take the Money?

At the risk of sounding like an accountant, “it depends.”  If you really need the money and are eligible, there’s already precedent in place for loan forgiveness so there’s virtually none of the uncertainty that existed last year when the first round of PPP came out.  

If you are considering selling your business, talk it over with a business broker (we know a few) as to whether this is something that should be done before putting your business on the market.  

However, if you don’t really need the money, then you probably shouldn’t take it.  There’s not an unlimited pool of funds, and there are businesses out there that could really use those funds to not just “get by,” but simply survive.  If we are going to make it through these months and years together, we are going to have to (continue to) think of others even as we make highly personal business decisions.

One of the new skill sets we picked up in 2020 was learning the sorts of questions banks contemplating a buy/sell business transaction are asking when Covid-19 and PPP are in the mix.  To learn more, feel free to give us a call.