Which Metrics Matter For Private Equity Investors

With the pandemic still in full force in most countries around the world, lots of companies have had to form strategic alliances to survive. Some industries were more affected than others and while lots of companies opted for mergers, some also had to look into private equity investors. 

However bad a knock the global economy has taken, it is also important to remember that M&As are not only fueled by economic hardships. Some company founders may have thought about cashing out for a while now or have received multiple compelling inquiries about selling their companies. If you are a company owner yourself then perhaps you are only considering selling company shares for investment purposes so you can propel your company to new heights. 

Whatever the reason may be, the right metrics can help you to seal the deal and let potential investors know that your company is going places. In this article, we will help you to pinpoint which metrics you can show to future investors. 

What are Private Equity Investors?

The funds of private equity firms are usually numbers-driven. It is a big pool of money that is used to buy companies to resell them in the future for a sizable profit. In other words, PE firms are expert buyers seen as buying and selling companies is how they make their living. 

PE firms base their decisions on data, and as such, one of the first things they do when contemplating investing in a company is to take a close look at the company’s finances. This allows them to assess which product lines are selling and which aren’t, and also helps them to pinpoint where one can cut operational costs.

This also helps establish how the company’s cash flow operates and will help PE firms determine if they will make a sizable profit when reselling the company to the next buyer. 

However, to do that, they need the company’s financial records to assess relevant financial and operational metrics. These metrics reveal the financial health of your business and serve as key performance indicators that indicate the success of your strategic growth initiatives.

When it comes down to it, these metrics can help to confirm or disprove assumptions about the organization’s strategy and allow you to readjust your approach where needed. By analyzing your financial and operational metrics regularly, you can help to keep your company on the right course which will better your chances of signing off on future M&A deals. 

Important Metrics for Private Equity Investors

Some performance metrics are more important than others and can reveal more about a company’s profitability, cash flow, customer acquisition, and overall growth. The following financial and operational metrics have been shown to pique PE firms’ interest and should be updated every year if one wishes to attract future investors.

Profit Margin

The average profit margin allows you to assess how much your company makes relative to how much it spends. It is calculated by dividing your net income by your net sales and gives key insight into both the current and future profitability of a company. For this reason, investors and PE firms usually want a full history of this critical financial metric so they can determine the value of their potential investment. 

Although fast-growing companies usually start out spending more than they make and then end up breaking even which eventually gives way to profitability, many companies are not so lucky. By keeping close tabs on a company’s profit margins, many companies can also assess why their profitability is either going up or down and correct their strategy.  

By benchmarking a company’s profit margin to that of similar companies, and by understanding the average profit margin, you can improve the accuracy of your revenue forecasting. Companies should have a well-rounded understanding of the entire revenue operations process and forecast expectations before buying or investing in another company. 

Cash Flow

Another revenue metric that ties in well with a company’s profit margins is its cash flow. Most private equity managers value businesses on their earnings before interest, amortization, depreciation, and their taxes, all of which ties in with a company’s cash flow. 

They look at all of these factors simultaneously so they have a holistic overview of the company’s cash flow in front of them. In the end, it is all about how the company has been balancing any seasonal financial needs with credit availability. If the company’s cash flow is optimal, they will likely be able to resell the business for more than what they paid you. 

It also means that the company is being optimally managed so that it can delay outlays of cash as long as possible and encourage company debtors to pay the company as soon as possible. If your company already has a great cash flow then PE Firms can lean on the current financial strategy to uphold the upward profitability trajectory of the company before reselling it again.

Sales Conversion Rate

At the end of the day, you want to know that the strategy you have in place can turn leads into loyal customers. A company’s sales conversion rate tells you exactly that. It refers to the percentage of business deals that are successful and turn prospects into buyers. If you assess the historical conversion rate of the company, it will shed some light on the company’s overall financial worth.

By tracking this metric over time you can see whether your revenue has been trending upwards or downwards. By leveraging your company’s past performance, you can show potential investors and PE firms where your company is heading. If the projection is positive, you will have better chances of landing an M&A deal.

Revenue Growth

What is the total contracted revenue that your company brings in every year? Is this metric growing each year? Knowing how your annual recurring revenue is performing is key to attracting investors. 

If you run a business that relies on customer subscriptions that vary in value and length to generate revenue, then ARR can be a great performance indicator to determine yearly growth. Not only can it put all the key subscription factors on a level playing field, but it can also tell you how much income you can expect from subscribers in a given fiscal year. 

When private equity firms are trying to pin down which companies are a good investment, they often look at a company’s overall growth. This can be determined by this metric because it showcases a company’s revenue trends within a given timeframe and helps them to get better clarity regarding their long-term sales forecast.

Furthermore, ARR can help to predict future revenue. This alone can help management in terms of important business decisions by telling them when the best time would be to hire more staff, invest in other ventures, or pour more money into research and development.

revVana Plan can help forecast your company’s revenue growth in real-time directly from your Salesforce CRM’s open pipeline and closed deals. Please visit the revVana Plan page to learn more.

In Conclusion

When it comes down to it, as a company owner you should stay on top of these important financial and operational metrics so you have something to show to potential buyers. PE firms, in particular, are very picky about the kind of metrics they want to look at before deciding to invest. 

By keeping an eye on and regularly updating key metrics, such as your conversion rate, annual recurring revenue, cash flow, and your profit margins, you can steer your company in the right direction and have an easier time selling it.