Tag Archives: Audit

What are Effective Metrics for a Service Company? Seven Suggestions

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Situation: The CEO of a service company finds it challenging to measure project profitability and client satisfaction. What measures and metrics have other service companies found to be most useful? What are effective metrics for a service company?
Advice from the CEOs:
• For billable services one CEO measures utilization percent defined as (hours available for service delivery)÷(billable hours). Include in the denominator both billable hours and customer good-will or preventative maintenance hours. The latter, while not producing current income, are an investment in future income. Set up audits for service needs, especially future needs, when working with customers. This will help you to stay abreast of changes in the service environment and to plan accordingly.
• For fixed budget projects – another CEO measures budgeted vs. actual expenditures by project.
• For fixed-fee services a third CEO calculates a fraction expressed as: (income per customer company) ÷ (cost in hours for that customer).
• In a discussion on customer audits and surveys, options offered included: (1) An exit “pizza party” with the client. The challenge is that this may produce tainted results. While this builds customer good-will and may provide qualitative feedback, it should be supplemented by more objective measures. (2) A mailed survey – from a 3rd party with a prize for responding. (3) Email follow-up from a 3rd party that directs the customer to the 3rd party site to complete the survey.
• A final suggestion was ambassadorial CEO visits to the top contact person in key accounts. This provides an opportunity to learn about the customer’s present and future needs, staffing plans, business and strategic direction. Helps to anticipate changes in the competitive landscape. The more a business relies on recurring revenue, the more important these visits are.

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How Do You Handle Open Issues from a Sale Agreement? Three Thoughts

Situation: A CEO has closed the sale of a significant company property. Due diligence was completed and was satisfactory, but the purchaser now wants to renegotiate the price. The CEO is concerned that if she yields on the price, the buyer will come up with additional changes that will further disadvantage the sale. How do you handle open issues from a sale agreement?

Advice from the CEOs:

  • One member had a similar issue following the sale of a previous company. The decision was that the price at the time of close was the price. The buyer had full opportunity to perform due diligence which would have uncovered any open issues. Condition at time of sale is “buyer beware,” which is why they were allowed a full due diligence.
  • The sale was “as is” including assumption of current debt on the property. It appears that the advantages to the buyer that are anticipated through the purchase will more than offset the impact of the existing debt. As a result, the buyer is, on balance, better off than they had anticipated. Thus, there is no need to yield on price.
  • On the timing of events that may not occur – an indirect cost audit by the company’s prime agency should this be necessary – there is a question of the financial impact to the company.
    • There is a default date on the final payment that could be held up by the negotiation, but the impact is not significant to the company.
    • Otherwise, the company’s interests are covered by the sale agreement.

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How Do You Value the Stock of a Private Company? Three Factors

Situation: A private company has not issued stock options in over 6 months. The business press highlights concerns over appropriate valuation at the time of option grant. How do you value the stock of a private company to assure that option awards reflect proper company value?

Advice from the CEOs:

  • Decide on the objectives of your valuation exercise. These may include:
    • A credible valuation to protect the Board from challenges over option valuation.
    • A calculation that the company can use quarterly or semi-annually to assess company valuation; possibly something that can be done internally on a quarterly basis, with independent validation annually.
  • Given that your concern is option valuation and protection of your Board, they only clean way to do this is to have an outside party perform your valuation. Internal valuations are subject to challenge. Look for reputable CPAs that specialize in private company stock valuation and get quotes from several for initial valuations plus follow-up valuations in 12 months. You may anticipate paying a fee of $12,000 to $15,000+ for this service.
  • There are issues that you will want to address in your valuation process:
    • A valuation must have a supportable rationale and demonstrate consistency of methodology so that valuations will be performed on a comparable basis year after year.
    • You want to see consistency between valuations with your annual financial audits which will reflect company performance.
    • There are at least two models that you may follow – a hard model and a soft model.
      • The hard model is a one-time valuation based on your financials. This may include historic performance, as well as forward-looking ROI.
      • The soft model is based on operational and risk assessment.

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