In the September 2012 edition of Inc. Magazine, the article “What Private Equity Investors Want: 5 Metrics” written by Ed Powers discusses 5 measurements an investor uses to gauge the health of a company. I found them to be very relevant metrics to measure the health for any business. The following are the excerpts from the article listing the 5 key metrics:
Cash flow Although net income is important (no one wants to own a business that isn’t making money), private equity managers are fixated on cash flow. They value businesses on EBITDA (earnings before interest, taxes, depreciation, and amortization). That’s the number they’re looking to boost and the one they’ll analyze most closely. Increased EBITDA is what’s going to allow them to eventually sell your business for more than they paid you.
Liquidity Your controller, bookkeeper, or chief financial officer (if you had one) was probably managing your company’s liquidity needs, balancing any seasonality in your business with credit availability. Liquidity is going to become more of an issue, because the private equity fund probably used some leverage to buy your company. Private equity managers will want weekly, monthly, and quarterly cash flow models (perhaps even daily in a crisis) to make sure your company stays within the liquidity covenants negotiated with its lenders. It’s impossible to predict liquidity needs perfectly, but modeling helps avoid crises.
Product-by-product analysis Cost accounting can be tricky in complex companies, and small firms can often lose track of where they are really making profits and generating cash. Expect a product-by-product analysis, with the goal of finding the true margins on each product. In service businesses, expect a focus on how contracts are bid and a particular emphasis on avoiding contracts that increase revenue but aren’t all that profitable.
Expense control Any new buyer will dig into current expenses, asking questions about your policies, why certain expenses have spiked, and how they are controlled.
Industry-specific metrics Each business will have its own key metrics—and they may surprise you. Often a good common-sense look by a new set of eyes (in this case, the private equity fund) will give you a better idea of which metrics you really should be concentrating on.
A B2B CFO Partner can help a business measure, monitor and improve these key metrics, resulting in a healthier and more valuable company.