There are literally hundreds of internal metrics and reports people use to evaluate businesses, and many of them can be useful. But unfortunately most of them rely on historical data which may not be too current or even relevant as markets change.
Looking at past data is, of course, important. But when evaluating a business, I do my best to look at the future. To that end, I think there are only five internal reports that really matter, which are listed below.
A few thoughts on these metrics:
- Many people like to dive into prior financial reports and pick apart obscure metrics like "defect density" or "operating efficiency rates" and that's great, and says a lot about how well your target is run and whether or not they even have systems that can reliably produce these numbers. If you find a target like this then I'm impressed. Most of the smaller and even midsized companies I work with aren't that advanced.
- Industries also matter. Although I feel that the metrics I've mentioned below are relevant across all industries, there are certain metrics that are important depending on the industry of your target. For example, I like to evaluate retail stores by looking at daily customer traffic and sales by customer. I like to look at project overage trends for construction firms. I also like to look at the realization (billable versus non-billable time) of client-facing employees at service firms.
- These metrics all assume that you're buying an entire company with the intention of continuing to operate it as a going concern. If the value of a company is in its assets like inventory, equipment or a customer list, then these metrics may not entirely apply because your goals are different.
Value is not necessarily a multiple of sales, profits or cash flow, and I believe that companies that solely rely on these metrics are potentially misleading themselves. There's other data that's just as useful, and the data that gives a buyer an insight into future trends is — in my opinion — the most important of all.
