Understand your 30-40-30 profit rule before selling your business
“Assumicide” is when we make an assumption about our business that our financial data doesn’t back up. Ask yourself….in looking at my detailed financial data, do I see clearly which parts of my business might be losing money, breaking even and those areas where we make money? Don’t assume, leverage your data to know.
When the day comes that you want to sell your business to a third party, their due diligence will have them looking for the answer to this question. And the answer they find will play a large factor in whether they want to acquire your business and if yes, how much they will be willing to pay. To ensure you’re prepared to excite the future acquirer, make sure today that you’re not just looking at your financials at the consolidated company performance level and assuming where you do and don't make money, but at a granular level, by markets, customers, products and services to understand true profitability.
Ask yourself, within our Markets, Customers, Products or Services that we sell:
- What areas are we losing money?
- What areas are we only breaking even?
- What areas are we making our profits?
Your company consolidated profit performance is therefore the net result of these three. For many businesses, the general rule is 30%-40%-30% respectfully to these three categories. Your company will have its own mix but imagine the net worth you could build into the future of your business if you know this level of detail and manage your business to eliminate or reduce the areas of loss or breakeven and protect and optimize where you truly make money.
Use time as a friend to identify this level of detail today. Meet with your controller or CPA on this critical analysis and ensure you’re on the path to your future euphoric exit event.
