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Maximize your Business Value

by Jeff Bruno on Oct 31, 2018 11:54:56 AM

I enjoy working with Trilogy clients, helping them to better understand their financials to set strategy and drive growth. But what happens when owners want to exit the business? How can they ensure that they get the highest value for the business they’ve dedicated their life to build?

As you may know, the industry standard valuation method is a multiple of a organization’s Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). The objective of a company in the short-term is to maximize EBITDA any way possible, to improve its value. However, depending on your industry or business model, one may have to decide if EBITDA is the best strategy to value your business as demonstrated by these two examples:

First, let’s look at MakeStuff, LLC, a manufacturing company that has been operating for 25 years and is positioning itself for exit. With a multiplier of 5X, any addition to EBITDA has considerable impact. While there are alternate ways to add to EBITDA from cutting overhead expenses to increasing sales, MakeStuff chooses to discount products heavily to incentivize purchasing and top-line growth. The gross profit margin will decrease, a strategy that may not be sustainable in the long-run, but every extra dollar of gross profit margin would improve the EBITDA. Ultimately, if the company raises the total EBITDA from $1,000,000 to $1,200,000 for the year, with a 5X multiplier, this would yield $1,000,000 more at time of sale.

Now consider Govt Software, LLC, a software company positioning for exit in the government space. Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR) are major factors for this type of entity and can be more critical than solely an EBITDA multiplier. Therefore, this company could have a completely different strategy than MakeStuff.

Govt Software’s value lies in its targeted niche, licensing specifically for government agencies and multi-year contracts. There are many larger companies that have better economies of scale with more dollars to invest in infrastructure, so Govt Software becomes very attractive as an added revenue line for a larger company.

In this instance, with the goal of exiting soon, Govt Software would be wise to reinvest all profits in sales and marketing initiatives that would help the company improve the overall MRR. With a revenue multiple of 3X, they would add $300K in company value for every $100K of annual contracts added, regardless of a positive or neutral effect to the EBITDA.

Preparing for exit is not something that should be left to chance or done without professional guidance. Each specific case needs to take into consideration the specifics of the business involved in the M&A transaction. If you’d like to have a conversation to learn more, contact Trilogy Partners at results@gettrilogypartners.com or 609-688-0428.

Trickle Down Metrics© and Why Companies MUST use Data to Drive Growth

by Jeff Bruno on Sep 06, 2017 11:59:14 AM

How do you stay competitive and manage growth? Trilogy Partners encourages its clients to rely upon data to analyze business trends. The purpose of data is to create an ongoing analysis of intelligence and the outcomes can provide impactful insights for decision making. I maintain that the key for any owner is to be able to clearly identify which Trickle Down Metrics© are the most critical drivers for their business and to focus their limited resources on monitoring these for the best outcomes.

The Trickle Down Metrics© of a company are the key performance indicators that permeate throughout all aspects of a business and drive the company towards the ultimate goals of the CEO and the organization.

Consider ABC Company, an application development company that creates custom software and applications for small-to-medium businesses at a fixed fee rate. The CEO built the company up to $2MM in revenue and $200K in annual net income within a few short years with grit, direct sales, and gut calls. His goal is to expand his team and diversify product offering within two years by increasing revenue, maintaining or increasing profitability, and reinvesting those profits into the new revenue channels.

Before acting, ABC Company identified its Trickle Down Metrics©, the data that would be used to drive decision-making:

  • Utilization Rate of Direct Labor – the percentage of a person’s total hours used to generate revenue and how much money is lost via unutilized hours
  • Booked Sales – total value of contracts closed within a given period, more pertinent to long term business health and long-term cash flows
  • Gross Profitability by Project – the gross profit of each project available to satisfy overhead expenses (total billed per project less all direct costs)
  • Billed Sales – total of value of contracts billed within a given period, more pertinent to short term cash flow

The CEO analyzed billable versus non-billable labor hours and found that his Utilization Rate of Direct Labor was around 90%, higher than industry average and an indicator that they would soon be overwhelmed. The CEO used this knowledge to confirm his decision to hire new direct employees.

The CEO then hired a VP of Sales and a Sales Administrator to ensure that his new employees would have consistent work. The two new hires spent six months closing an acceptable number and revenue of Booked Sales, however they mistakenly miscalculated the fixed fee contract.

This pricing error began to eat into Gross Profitability of Projects and some of the smaller projects weren’t profitable at all! However, by monitoring the issue over time, the CEO could isolate the issue and act before it worsened. The CEO hired a project manager sooner than originally planned to handle the estimation duties and keep labor costs down.

Billed Sales had increased 40% to $2.8MM, but ABC lost slight profitability in the short-term due to the estimation issues. Outside this slight bump, they are on track towards their goal of maintaining profitability and reinvesting cash into new revenue channels.

At Trilogy Partners, we believe that with data, decision making is focused and deliberate rather than subjective and arbitrary. If you’d like to like to learn more about using Trickle Down Metrics© to drive growth in your business, contact me at jbruno@gettrililogypartners.com or (609) 688-0428.

Summer is Fast Approaching! Who Cares about Financial Management?

by Jeff Bruno on Apr 29, 2016 4:02:07 PM

You may be asking, “Can’t I just relax and take some time off?”

I say, yes you can! Here are some points to consider when it comes to staying ahead of financial management so you can really enjoy that beach vacation!

  1. Cyclicality of Business Cycles and Sales along with Cash Management
  2. Inventory Management
  3. Labor & Productivity

Are your sales increasing? Decreasing?

Have you aligned all your budgets and general strategic planning for fall 2016?

Did you anticipate an increase or slow down with inventory management?

Are your employees engaged or checking out?

Watching your metrics, looking at your historical financials and planning accordingly is critical for everyone to have a good summer. If things are aligned and planned in advance, your CEO and employees will feel little stress. Here are some good metrics to consider and use accordingly when planning for the summer:

  1. GM (Gross Margin) – Can you charge more on certain products which would increase your GM or do you need to offer discounts to customers? Look at your historical gross margin numbers from summers past, and put plans in place to change those prices accordingly so both your employees and your customers are clear about their options.
  2. Inventory Turns – If you normally turn your inventories 4 times per year and your average inventory is $250K, that means during the three months of summer you need $250K of inventory, right? Not necessarily! Look at historical data and make sure the inventory turn number is aligned. Then you can cut back or ramp up on ordering product to avoid cash stress and maintain proper staffing.
  3. Sales & Profit per Employee – This one can be a great sign of productivity. If average sales per employee remains the same, but the profit drops precipitately during the summer, there could be issues. Make sure your team is not trying to hit sales goals at any cost just to get to the beach early on Friday. If profits are up vs. sales, give them early dismissal on Friday.
  4. Labor Cost/Hour – If you manufacture goods and sell online, be careful to follow this metric. If this number is normally $25/hour and starts to creep closer to $30/hour, there are too many high paying managers or staff assuming roles that they shouldn’t be focused on. Make sure you have the right mix of support like summer interns to keep that cost down.

The bottom line is this: If you understand your financial operation and plan ahead, the summer should be a great time for your business to thrive and both you and your employees to take some much needed time off.

Nothing helps a business grow more than rested, motivated and strategic employees!

Ok, let’s hit the beach!

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