Selling your company one day will include an acquirer’s probe of a key metric, be ready
Ask yourself this question – is my Gross Profit being accurately tracked and reported?
Too often we find the answer is no.
First let’s explain the difference between Gross Profit and Gross Margin. Gross Profit is a monetary amount, i.e.: the dollars left after subtracting your cost of goods/services sold from your Net Revenue but Gross Margin is the percentage ratio (your cost of goods/services sold divided by your Net Revenue). So the former is the absolute dollar amount, the latter is the amount represented in a percentage.
In terms of reporting this number accurately, there is the GAAP definition and there are also nuances related to your particular industry. You want to understand how your reporting relates to both of these.
For example, where do you capture and allocate factory/office overheads like rent, insurance benefits for your direct labor, R&D costs or direct labor vacation costs and the list could go on. You might have the way that you like to look at your gross profit, but you have to ask yourself, is this reporting also how a future acquirer would expect to see it for my industry? And ask yourself, do we only report gross profit at the company consolidated P&L level or are we able to report it for each of our products/services and by key market segments and even by individual customers? A future acquirer will probe your gross profit beyond just the consolidated level so you want to be ready for this but you shouldn't just do this level of reporting for a future acquirer, you should be doing it so your team gets a more strategic view of your company today.
Talk with your Controller/CFO and your CPA to discuss your reporting in this critical area. You want to avoid trying to sell your company one day only to find out that the potential acquirer wants to recast your financial statements because they don’t agree with how you’ve been reporting gross profit in your industry. Use time as a friend to get this right in your historical tracking and avoid a common misstep in one day achieving your future euphoric exit.
