Improve Profitability Through Closing

Anyone who has run a business for a while has learned that overhead rarely increases as fast as sales go up and NEVER falls as fast as sales drop. For this reason a 10% decrease in sales can result in a 50% decrease in profits which can translate to a 50% decrease in business value. For instance, XYZ Retail Stores sells clothing. In 2004 sales were $1,000,000. The cost of goods sold was $500,000 and the operating costs were $400,000 leaving a profit of $100,000. Using an overly simplified valuation technique of multiplying the profit by 3 the value is $300,000. If in 2005 sales drop to $900,000 the cost of goods sold should be $450,000 (unless you bought too much inventory and then the result could even be worse) and if it is like most retailers the operating costs are going to still be very close to $400,000 making the profit $50,000. Now using the 3 multiplier the value is $150,000. The owner lost $150,000 of business value when he lost $100,000 of sales.

While this is oversimplified the basic logic and approximate result is the same as is likely to be found in a complex detailed valuation. Usually the price is based somewhat on a three or five year average, but the last year or two will weigh significantly more than the earlier years. Too many owners rest on their laurels because “I didn’t really need the money, but the business could have earned it”, or “we figured we were going to sell anyway, so why put in the extra effort.”

Of course, the good news is that if profits are increasing that will increase your sales price. It also improves your negotiating position because as results keep improving over time the price can go up.

Our experience is if you want to get paid for it at the time of sale, earn it now. Buyers are very skeptical. They want to pay for what you have done not for the “opportunity.” The opportunity is why they are buying a business instead of simply taking a job.