Tag Archive for: GrowthStrategy

Using KPIs to Build a Stronger and More Valuable Business

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Business owners cannot manage their companies effectively without understanding what drives financial and operational performance. Financial statements provide essential information, but they primarily explain what has already happened. Business performance indicators help management anticipate what may happen next. Key Performance Indicators, or KPIs, measure the activities and results that matter most to a company’s success.

Start With Financial Performance

Every owner should regularly review the income statement, balance sheet, and cash flow. However, reviewing individual months provides only part of the picture. Management should compare current results with budgets, prior periods, and historical trends. Industry benchmarks may also provide useful context when reliable comparisons exist.

Financial KPIs may include revenue growth, gross margin, EBITDA margin, days sales outstanding (DSO), and working capital. Alongside these measures, owners should identify the operational factors that produce financial results.

Identify Leading Indicators

Some of the most valuable KPIs appear before changes reach the financial statements. A contractor might monitor backlog, bids submitted, win rates, and project margins. A service company might track recurring revenue, customer retention, utilization, and new customer acquisition. A manufacturer could monitor capacity utilization, scrap rates, throughput, order volume, and on-time delivery. Earlier in the performance cycle, these indicators can provide warning signs or identify emerging opportunities.

Owners should ask a simple question: What would change first if our business started getting better or worse? The answer often identifies the company’s most useful leading indicators.

Turn Information Into Action

Tracking KPIs creates little value unless management acts on the information. Companies should establish targets, assign accountability, and review results consistently. Management may then investigate meaningful variances and determine appropriate responses.

When patterns emerge, leaders may adjust pricing, staffing, inventory, marketing, capital spending, or other operating decisions. A concise dashboard may keep management focused on the measures that matter most. Too many KPIs may obscure meaningful information rather than improve decision-making.

KPIs Support Business Value

Buyers want to understand more than historical earnings. They also want evidence explaining how the company generates those earnings. Well-developed business performance indicators demonstrate operating discipline, management depth, predictable performance, and visibility into future results.

For an owner preparing for a sale, KPIs can also strengthen the company’s investment story. They provide measurable evidence supporting growth trends, competitive advantages, and future opportunities. An experienced M&A advisor should identify the KPIs that prospective buyers will find most relevant. The advisor may then analyze historical trends and connect operating performance to the company’s financial results.

As sale preparations advance, the advisor may incorporate these measures into the Confidential Information Memorandum and other buyer materials. This analysis helps buyers understand what drives revenue, margins, and future earnings. KPIs also support management projections by connecting forecasted results to measurable operating assumptions. During due diligence, consistent KPI reporting help validate those assumptions and explain changes in performance.

An M&A advisor may also identify unfavorable trends before buyers discover them. Management then has time to investigate the causes, address problems, and prepared credible explanations. Strong businesses do not simply report financial results. They understand the operating factors behind those results. An experienced M&A advisor uses KPIs to help buyers understand those drivers and recognize the value they create.

M&A Advisor

How an M&A Advisor Guides a Business Sale

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Selling a privately held company requires the owner to make significant decisions while continuing to operate the business. An experienced M&A advisor manages the transaction process and helps the seller make informed decisions at each stage. The M&A advisor responsibilities extend far beyond finding a buyer. They begin with preparation and continue through closing.

Establish Value and Prepare the Business

The advisor should first understand the seller’s financial, professional, and personal objectives. A preliminary valuation establishes a current benchmark and helps set realistic expectations before approaching buyers. An Exit Readiness Assessment should accompany the valuation to identify risks and opportunities to strengthen business value.

At the preparation stage, the advisor also reviews financial performance, normalizing adjustments, working capital, and other transaction considerations. This work helps identify potential issues before prospective buyers begin their evaluation.

Develop the Investment Story

Buyers need more than financial statements to understand an acquisition opportunity. The advisor develops a Confidential Information Memorandum that explains the company, financial performance, operations, and competitive position. The memorandum should also address management, customers, growth opportunities, and other significant value drivers. From this foundation, the advisor positions the company around the characteristics most relevant to prospective buyers.

Identify and Qualify Buyers

The advisor develops a buyer universe based on strategic fit, financial capacity, acquisition history, and investment criteria. Potential buyers may include strategic acquirers, private equity firms, family offices, and qualified individual buyers. The advisor then conducts confidential outreach and evaluates buyer interest. Qualified buyers sign confidentiality agreements before receiving detailed company information. This process protects sensitive information while focusing resources on credible acquisition candidates.

Create and Manage Competition

One of the most significant M&A advisor responsibilities involves creating a competitive marketplace for the seller. The advisor coordinates buyer communications, deadlines, management meetings, and offers. When multiple qualified buyers participate, the seller gains alternatives and greater negotiating leverage. The advisor compares more than purchase price. Transaction structure, consideration, financing, contingencies, and seller involvement also affect an offer.

Negotiate the Transaction

The advisor helps negotiate the Letter of Intent before the seller grants exclusivity. Major economic terms should receive careful attention while competitive leverage remains available. These terms may include working capital, earnouts, seller financing, rollover equity, escrows, and post-closing involvement. The advisor also works closely with legal and tax professionals as negotiations progress.

Manage Due Diligence and Closing

After the LOI, the buyer begins confirmatory due diligence while attorneys negotiate the definitive purchase agreement. The advisor coordinates information requests, buyer questions, financial analysis, and communications among the transaction team. Through the closing process, the advisor helps resolve issues without unnecessarily distracting management from daily operations. Confidentiality also requires continued attention as more employees and outside parties become involved.

Keep the Seller Focused on the Objective

A business sale often takes months and involves difficult negotiations, changing circumstances, and competing priorities. The M&A advisor provides continuity throughout that process while the owner continues operating the company. The advisor’s role is not simply to find a buyer. It is to manage a disciplined process from preparation through closing.

Value Drivers

Strengthening the Value Drivers that Buyers Reward

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Strong earnings provide an essential foundation for business value. However, buyers also evaluate the quality and sustainability of those earnings. They want to understand how the company produces its results and whether those results will continue under new ownership. Buyers also consider the resources required to maintain current performance and support future growth. These business value drivers influence perceived risk, future earnings expectations, and the value buyers place on the company. For sellers, strengthening these characteristics should begin well before the sale process.

Build Sustainable Financial Performance

Buyers generally place greater confidence in earnings that demonstrate consistency, predictability, and opportunities for continued growth. Strong margins, reliable financial reporting, recurring revenue, and disciplined working capital management provide evidence of financial stability. Buyers will also examine historical revenue and profitability trends across multiple periods. Significant fluctuations may require explanations, particularly when recent performance differs materially from historical results.

Growth deserves similar scrutiny. Buyers want to understand what produced historical growth and whether those factors remain sustainable. They may examine pricing, customer additions, geographic expansion, new services, acquisitions, or increased market penetration. From an earnings perspective, sustainable performance carries greater weight than a short-term improvement immediately before a sale.

Reduce Concentrated Business Risk

Customer concentration represents one of the most common risks buyers encounter. Dependence on a few customers exposes future earnings to the loss of individual relationships. The concern becomes greater when those relationships depend primarily on the owner or lack contractual protection. Supplier concentration, employee dependence, and reliance on a single product may create similar concerns.

Geographic concentration may also increase exposure to regional economic conditions or changing customer demand. Diversification across customers, suppliers, products, services, and revenue sources strengthens the company’s financial foundation. Long-term customer relationships and recurring revenue further support predictability. Owners should address concentration through thoughtful growth rather than simply turning away profitable business.

Develop Management Beyond the Owner

A company becomes more transferable when its success does not depend heavily on the owner. Buyers want confidence that employees, customers, and operations will remain stable after the transaction. A capable management team should understand its responsibilities and possess appropriate decision-making authority.

Management should also demonstrate the ability to operate the company without constant involvement from the owner. Documented procedures, reporting systems, performance measurements, and defined responsibilities reinforce that independence. Employee retention also deserves attention, particularly when certain individuals hold critical customer relationships or operational knowledge. As leadership expands, the company becomes less dependent on any single person and more transferable to a new owner.

Strengthen Competitive Advantages

Buyers also evaluate why customers choose the company instead of competitors. A strong competitive position helps support future revenues, margins, customer retention, and growth opportunities. Competitive advantages may include specialized expertise, intellectual property, certifications, technology, geographic position, or established distribution channels.

Other companies may benefit from proprietary processes, strong brands, switching costs, exclusive relationships, or difficult-to-replicate capabilities. Industry-specific business value drivers may include backlog, referral networks, supplier relationships, equipment quality, or specialized operating capabilities. The strongest advantages should produce measurable economic benefits rather than simply differentiate the company. Buyers will evaluate whether those advantages transfer with the business and remain defensible after closing.

Improve Systems and Operating Infrastructure

Buyers also consider whether the company has the infrastructure required to support its current size and future growth. Strong accounting, customer relationship management, operational, and reporting systems provide greater visibility into business performance. Documented processes help employees perform consistently and reduce dependence on institutional knowledge.

Facilities and equipment should also support the company’s operating requirements. Deferred maintenance or outdated equipment may signal significant capital expenditures after closing. Likewise, inadequate systems may require the buyer to invest additional resources immediately after the acquisition. A scalable operating foundation supports growth without requiring disproportionate increases in overhead or management involvement.

Identify Weaknesses Before Buyers Do

Owners should evaluate value drivers before entering the marketplace. A preliminary business valuation establishes the company’s current value and provides a financial benchmark. An Exit Readiness Assessment should accompany the valuation to identify risks and opportunities to strengthen business value. The assessment evaluates the company from the perspective of prospective buyers. It may examine earnings, growth, customer concentration, management, operations, reporting, competitive advantages, and other significant characteristics.

The owner then has a practical roadmap for deciding where to invest time and resources. Some weaknesses require relatively straightforward corrections. Other may require substantial operational or strategic changes.

Give Improvements Time to Produce Results

Buyers place greater confidence in demonstrated improvements than plans presented shortly before a sale. Early preparation gives management time to implement changes and establish a measurable performance history. For example, hiring a senior manager shortly before a sale provides limited evidence of reduced owner dependence. Several years of successful leadership provides a much stronger record.

The same principle applies to customer diversification, new markets, recurring revenue, operational improvements, and growth initiatives. Historical results provide buyers with evidence that improvements have become part of the business. Over a longer horizon, these improvements strengthen the characteristics buyers evaluate when determining risk and value.

Present Those Strengths to the Marketplace

Building a stronger company represents only part of the value equation. The seller must also present those strengths to buyers that understand and value them. An experienced M&A advisor identifies the company’s strongest value drivers and incorporates them into the investment story. The advisor then identifies prospective buyers with strategic or financial reasons to value those characteristics.

A competitive sale process allows different buyers to evaluate the company based on their individual objectives and potential synergies. Increasing sales value starts long before the company enters the market. Strengthening the underlying value drivers gives buyers stronger reasons to compete.

Pepperdine Private Capital Markets Project

Finding Growth Capital Beyond Traditional Bank Financing

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Many business owners are becoming increasingly optimistic about opportunities to grow their companies. However, access to capital remains a significant obstacle. The Pepperdine Private Capital Markets Project highlights this disconnect. Nearly half of surveyed business owners report insufficient financial resources to execute their growth strategies.

Meanwhile, the continuing effects of the financial crisis have changed the financing environment for privately held companies. Approximately 250 banks have failed since the financial crisis began in 2007. Additional failures and tighter lending standards may further restrict traditional credit. Against these conditions, business owners should understand the broader range of capital available to support growth.

Looking Beyond Traditional Bank Financing

Commercial banks remain an important source of financing for established businesses. However, conventional bank debt may not satisfy every company’s capital requirements. Owners may therefore need to consider alternative growth capital.

Potential sources include asset-based lenders, mezzanine funds, private equity firms, venture capital firms, angel investors, and factoring companies. Family and friends may also provide capital in certain circumstances. Each source presents different costs, risks, and requirements.

Debt financing may preserve ownership but creates repayment obligations. Equity financing may provide greater flexibility but requires owners to share ownership and future value.

Match the Financing to the Growth Strategy

Access to capital alone does not make a financing source appropriate. Owners should first determine why they need capital and how the investment will support growth. A manufacturer purchasing equipment may require a different structure than a company pursuing an acquisition. A rapidly growing company may need additional working capital to support increasing sales.

When evaluating alternatives, owners should consider interest rates, repayment terms, collateral requirements, covenants, and potential ownership dilution. Management should also understand how each financing alternative may affect future flexibility.

Use the Private Capital Markets

The Pepperdine Private Capital Markets Project provides valuable information about the changing private capital environment. The research examines banks, private equity firms, venture capital firms, angel investors, factors, and other capital providers. It also examines financing conditions, investment criteria, and the cost of capital across different market segments. For growing companies, this information may help owners evaluate financing sources beyond their traditional banking relationships.

Prepare Before Seeking Capital

Capital providers need a clear explanation of the opportunity before committing funds. Owners should prepare a business plan explaining the company’s strategy, financial performance, growth opportunities, and capital requirements. Financial projections should demonstrate how management intends to use the capital. They should also show the expected effect on revenue, earnings, and cash flow.

Alternative growth capital can provide additional options during a challenging credit environment. The objective is not simply to find available financing. The right financing should provide sufficient capital while supporting the company’s growth strategy, financial capacity, and long-term ownership objectives.

Allston Advisory Group is an experienced boutique M&A advisory firm providing a variety of services to lower middle market companies. See our footer for contact information.

(502) 742-2933
[email protected]
P.O. Box 21266, Louisville, KY 40221

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