Operational Metrics and KPIs: Guiding Success in Buy and Sell Decisions

September 10, 2024 | by Keith Yeater

In a perfect world, a deep dive into the financials of a potential acquisition would be enough to determine whether you should make an offer. 

Unfortunately, this isn’t a perfect world. 

So, while considering the financials of a company during the lead up to acquisition is important, it doesn’t tell the whole story. Attractive profit margins and steady revenue growth can distract from real problems living beneath the surface.  Poor safety records, looming workforce retirement spike, inconsistent inventory turns, and significant work-in-process (WIP) levels–to name just a few–can spell trouble down the line if not identified early in the process.

In both the buying and selling cycles, key operational metrics and KPIs play a vital role. They provide a deeper, more nuanced understanding of a business’s health and potential, guiding strategic decisions that financial reports alone can’t fully support. For businesses, leveraging these metrics can mean the difference between a successful acquisition or sale and a costly mistake.

The Buying Side

When businesses consider acquiring another company, they often spend significant time and resources scrubbing financial reports for inconsistencies and opportunities to reduce costs. However, this focus on financials can sometimes overshadow equally important operational metrics.

Key Operational Metrics to Consider:

1. Safety Record: A company’s safety record reflects its commitment to employee well-being and operational efficiency. High incident rates can indicate underlying issues in management and operational practices.
2. Inventory Turns and Days Sales on Hand: These metrics show how efficiently a company manages its inventory. Low inventory turns or high days sales on hand can signal overproduction, obsolete stock, or poor demand forecasting.
3. Work in Process (WIP): High levels of WIP can indicate inefficiencies in production processes, leading to increased costs and delayed delivery times.
4. Quality and Rework: Metrics related to quality and rework highlight how often products need corrections after the initial production. High rework rates suggest issues with quality control and can lead to increased costs and customer dissatisfaction.

If an organization isn’t mature enough to track KPIs around these operational areas, it might rely more on tribal knowledge than data-driven decision-making. While this approach can work, it poses risks if key employees leave or lose their enthusiasm. Mature companies typically track KPIs in areas like safety, delivery, and cost, providing a more stable and predictable business environment.

The Selling Side

Looking at it from the other side of the negotiating table, digging deep and showing the operational health of the company you’re selling can ensure you get the most from the sale. How much more trust would you build with a potential  buyer if you presented them with the relevant KPIs mentioned above before they even thought about asking for them, saving them the time, effort, and trouble of doing the work themselves? For example, as we’ve talked about before, going beyond the surface level Quality of Earnings (Q of E) report to access the data generally found in a Quality of Operations (Q of O) proposal can build excitement and increase the overall credibility of not just the company you’re selling, but you as well. Honesty is always the best strategy. And when it’s paired with clear data showing the true health of the company? It’s a win for everyone involved.

Enhancing Strategic Positioning

Incorporating data-driven decisions through these operational metrics and KPIs can significantly enhance a company’s strategic positioning. For buyers, it means making more informed decisions and avoiding potential pitfalls. For sellers, it ensures that the company presents itself as a mature, well-run business, thereby attracting more interest and potentially commanding a higher price.

While financial reports are crucial, they are only part of the story. Operational KPIs offer a deeper, more accurate view of a company’s true performance and potential. By paying close attention to these metrics, businesses can make smarter, more strategic decisions, whether they’re buying or selling. Looking beyond the surface numbers can reveal the real story, guiding you toward success.