Know How Your Business Compares to Its Competitors
Especially in this era of COVID-19, when belts are tightened and entire industries are challenged, it is imperative to generate and analyze an accurate comparison between your business and your competition. But, how can this be done in times such as this?
As we’ve covered previously, COVID-19 does not change the basics of sound business practice. This month, we will explore how to effectively compare your business against your competition as you prepare for a sale.
When evaluating your business as a potential investment, every qualified buyer will want to know how it performs relative to its competitors within the industry. Of course, this comparison should be practiced regularly as you seek to either profit from your advantageous position in the industry or bolster an area that lags behind your competition. A key method to analyze the performance of your business against that of your competition is by benchmarking your financial statements.
Common-Sizing an Income Statement
To begin the process of benchmarking your company against others in your industry, we suggest preparing common-sized financial statements. Common-sized financial statements, as a comparative tool, will display their components as a percentage of a common base figure.
This allows for a clearer comparison of your financial statements over time and provides a method to compare against peer companies. Using these common-sized financial statements can also highlight trends when analyzing financial statements.
Common-sizing an income statement lists each item as a percentage of total revenue. This process forms a basis to compare like figures against those of other companies in your industry as the same formula is applied to their income statements. In this way, the relative figures of your business may be more effectively compared with the equivalent relative figures of other companies.
Sample Company “A”
| Revenue | $10,000,000 | 100% |
| Cost of sales | 5,230,000 | 52.3% |
| Gross margin | 4,770,000 | 47.7% |
| Research & Development | 120,000 | 1.2% |
| Sales & Marketing | 620,000 | 6.2% |
| General administrative | 140,000 | 1.4% |
| Operating expenses | 860,000 | 8.6% |
| Depreciation | 110,000 | 1.1% |
| Banking Charges | 10,000 | 0.1% |
| Income before tax | 2,910,000 | 29.1% |
| Corporate tax expense | 582,000 | 5.8% |
| Net income | 2,328,000 | 23.3% |
Compare Against Competition
To acquire benchmark data for other businesses in your industry, you may seek out online databases or industry trade groups. Often, valuation firms and investment banks have access to these databases as well, and they may be open to providing this information to you in exchange for a business relationship with them.
With all data in front of you, you can begin to analyze and compare the strength of your business against that of your competition. You want the ratios for your business to be equal to or better than the average for your industry. The key measurements of revenue growth and profitability should be increasing at the same rate or better than the industry average. Other aspects of your business may be compared in this way as well.
| Sample Company “A” | Industry | |||
| Revenue | $10,000,000 | 100% | $20,000,000 | 100% |
| Cost of sales | 5,230,000 | 52.3% | 11,360,000 | 56.8% |
| Gross margin | 4,770,000 | 47.7% | 8,640,000 | 43.2% |
| Research & Development | 120,000 | 1.2% | 300,000 | 1.5% |
| Sales & Marketing | 620,000 | 6.2% | 1,420,000 | 7.1% |
| General administrative | 140,000 | 1.4% | 440,000 | 2.2% |
| Operating expenses | 860,000 | 8.6% | 1,900,000 | 9.5% |
| Depreciation | 110,000 | 1.1% | 280,000 | 1.4% |
| Banking Costs | 10,000 | 0.1% | 40,000 | 0.2% |
| Income before tax | 2,910,000 | 29.1% | 4,260,000 | 21.3% |
| Corporate tax expense | 582,000 | 5.8% | 852,000 | 4.3% |
| Net income | $2,328,000 | 23.3% | $3,408,000 | 17.0% |
With the knowledge gained through such comparisons, you will have a better understanding of your relative financial performance. Accordingly, this information equips you to explain in detail to a potential buyer where you have distinct advantages over your competition as well as areas of potential growth that can be achieved for the buyer after the sale.
Right Tools; Right Partners
When it comes to selling your business, you want to employ the right tools and the right procedures to uncover the true investment value of your business. It is also important to choose the right partners to help navigate the process of selling your business.
At Piedmont M&A, we have years of practice guiding mergers and acquisitions to fruition. Accordingly, we will be eager to work with you to position your business so that you can realize your priorities as you consider exiting your business.
We hope you will request a copy of our reference guide, “The Seller’s Guide for Middle Market Companies.” It will prove a valuable resource as you position your business for sale. Of course, we welcome your call for questions or clarification at 404-719-4792 anytime.
