Are you in the 30%

Are you in the 30% ‘sellable business’ category? A shocking 70% of businesses in the below study barely break even or make a loss. A study was conducted by the Business School at Bremen University, Germany in 2016 as part of a doctoral thesis. The data was generated by tapping into the central company register database (Handelsregister) into which all German companies are mandated by EU Law to upload their annual condensed financials. Here are the findings:

• The overall average of 10,000 SMEs = 2.7% EBIT margin
• The average of the Top 10% SMEs = 17.1 % EBIT margin, meaning they contributed 1.7% of the overall 2.7% average
• The next Top 20% contributed the 1% balance of the overall average, meaning the remaining 70% either break even or make a loss

Based on these stats, only 30% of the SMEs surveyed are ‘sellable businesses’ that can provide profitability and financial returns. The remaining 70% fall into the almost ‘unsellable category’, unless acquired for non-financial strategic reasons such as increased market share, geographic expansion, skills acquisition, technology adoption, and so on. Mike Finger received a lot of push back from a recent LinkedIn post stating that “80% of small business owners will fail to sell their business successfully”. If the average buyer is not interested in a strategic acquisition and is rather looking for a business that will provide financial returns, then the above stats validate this argument.I spoke with Steven Wilkinson about the study findings, as he has extensive experience with the German SME sector. He pointed to the three things the Top 10% companies highlighted as defining their success were:

1. A relentless focus on solving their specific customer problems (strategic specialization)
2. Clarity around where they are heading (vision of the desired future state)
3. Obsessive about financials, margins, and balance sheet strength (strong financial literacy)

These attributes are attainable for most businesses. It requires business owners to act with intention in how they strategically serve their customers, set a clear vision of their desired future state, and improve their financial literacy to enable better decision making. Steven further says “small businesses are extremely sensitive to marginal improvements in the quality of their operations. The returns to competence are nowhere greater than with SMEs”. This gives hope to those with the courage and conviction to build a business of value, improving the lives of their family and staff, while increasing their chances of a positive exit when the time comes. It is amazing the difference even marginal improvements in your operations and financial literacy will have on your business. Take action and be better!