How your Business Compares to the Competition

As the vaccine becomes more widely available and parents become more comfortable returning their children to preschool, it’s very important to generate and analyze an accurate comparison between your school/schools and the competition. In this post, we will walk you through how to evaluate your own school, as well as how to compare yourselves to the competition.

When evaluating the business as a potential investment, every owner or buyer will want to know how the business performs compared to the competition. A great method to evaluate the performance of your business against industry peers would be by benchmarking your financial statements. This should be evaluated and reviewed regularly to ensure expenses are staying in line and to identify where you have advantages or disadvantages compared to the competition.

Common-Sizing an Income Statement

To begin the process of benchmarking your company against others in the industry, we suggest preparing a common-sized financial statement. Common-sized financial statements, as a comparative tool, will display various lines of the Income Statement as a percentage of a base figure within the statement. This allows for a clearer comparison of financial statements over time and provides a method to compare against competitors without having to find similarly sized businesses.

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. Please see “Sample Company A” common-sized income statement below:

Sample Company “A”

Revenue $5,000,000 100.0%

Cost of sales $2,615,000 52.3%

Gross margin $2,385,000 47.7%

Research & Development $60,000 1.2%

Sales & Marketing $310,000 6.2%

General administrative $70,000 1.4%

Operating expenses $430,000 8.6%

Depreciation $55,000 1.1%

Banking Charges $5,000 0.1%

Income before tax $1,455,000 29.1%

Corporate tax expense $291,000 5.8%

Net income $1,164,000 23.3%

Competition Comparison

To acquire benchmark data for other businesses in your industry, you may seek out online databases or industry trade groups. In addition, valuation firms and investment banks have access to these databases, and may be open to providing this information 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 $5,000,000 100% $13,400,000 100%

Cost of sales $2,615,000 52.30% $7,611,200 56.80%

Gross margin $2,385,000 47.70% $5,788,800 43.20%

Research & Development $60,000 1.20% $201,000 1.50%

Sales & Marketing $310,000 6.20% $951,400 7.10%

General administrative $70,000 1.40% $294,800 2.20%

Operating expenses $430,000 8.60% $1,273,000 9.50%

Depreciation $55,000 1.10% $187,600 1.40%

Banking Costs $5,000 0.10% $26,800 0.20%

Income before tax $1,455,000 29.10% $2,854,200 21.30%

Corporate tax expense $291,000 5.80% $570,840 4.30%

Net income $1,164,000 23.30% $2,283,360 17.00%

By benchmarking yourself and analyzing how you stack up among the competition will help you have a better understanding of the business’s relative financial performance. Accordingly, this information equips you to explain in detail to a potential buyer where the distinct advantages of your business over the competition lie as well as areas of potential growth that can be achieved for the buyer after the sale.

When it comes to selling your business, as an owner, you’ll want to bring on a sell-side advisor that will be able to identify and highlight your strengths to potential buyers. In addition, your advisor should also inform you of areas where the competition may have a leg up, this will be attractive to buyers as it is an opportunity to increase the overall bottom line if it’s something mendable.

Here at SchoolWise Partners, we have years of experience assisting owners to get them the best value for their business. In turn, we are eager to work with you whether you are considering selling your business, or just starting to explore the option. We would be more than happy to discuss future goals even if an exit is years down the line.

Feel free to reach out, we welcome your call for questions and comments at 305-646-9970 anytime.