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.

Build A Sales and Marketing Process

Sales and marketing is the most important system in at least 90% of the businesses we look at. It is also one of the biggest weaknesses in many companies. Certain industries such as construction subcontracting are very dependent upon relationships. An owner with a few good relationships can build a fairly large volume business. This is great until it is time to sell. Then prospective buyers will view the high risk of loosing major clients negatively. This reduces the value of the business.

On the other hand, some businesses build lead generation systems that are not personality based. They are based on advertising, word of mouth, direct mail, location, or other technique that has been proven to work in the past. The leads are given to trained salespeople who know how to close a reasonable percentage of the prospects. These systems are tracked and fine tuned to improve performance. Auto dealerships, software companies, distributors, and many other businesses use these techniques to improve their business and increase the transferability of the business.

Wouldn’t you feel more comfortable with a sales system that is independent of the owner and proven over time? If there is any way possible in your industry to build an independent system do so. This will increase your business value

Trend Data - Implement and Record Essential Business Systems

Start today and implement this important management procedure.
A business is nothing but a series of systems that produce a service or product in return for money. Are your systems defined? Are tasks performed in reasonably consistent ways so that the work and people are somewhat interchangeable?

For instance, a large contractor had a 7 person estimating department. As work was performed it was always personally reviewed by a senior staff member who carefully critiqued the format and the accuracy of the work. This way junior staff learned how to perform the work so that anyone could pick up any file and understand what needed to be done to complete the file, what assumptions were made to find a price, and in the end a summary of bids showing the lowest price.

For a small business the written record of the systems can be fairly brief and augmented by some cross training and oversight. As the business grows more comprehensive manuals are needed to ensure consistency of work product, treatment of staff, and other matters.

A related problem is when all paths lead to the owner. Many owners delegate the grunt work, such as the estimating above, but never give authority to anyone to make a decision. For instance the owner may not allow even small contracts to be awarded in his absence. Develop a quality management team that effectively implements your systems and test them by taking a long vacation. If your business cannot run without you expect to spend considerable amount of time after closing doing the training you should have done beforehand.

Improve Your Business Value – Know Your Key Numbers and Track Them

Every business can be improved. For the best results, remember the 80/20 rule. 80 percent of what you work on is not that essential. The other 20 percent is the key. We recommend you determine and work on the 20 percent that will dramatically improve your business.

Every successful business person we have ever worked with has a shorthand business management system that allows them to track the business in real time.

Small business owners often have an old green accounting ruled book where they post these critical numbers. Larger business owners have summary reports straight from the computer or compiled by trusted staff to track the most critical details.

An example of this was done by the owner of a title insurance and settlement shop we know. Weekly he would track the following items; newly opened cases, total backlog, and settled cases by unit and dollar amount. Just based on those few numbers, he knew financially where the business was at all times.

This information allows you to make adjustments as soon as market changes appear instead of months later when the checkbook is finally tied into the historical (meaning already old) accounting data.

Every industry has these critical numbers that provide an effective shorthand way for experienced operators to know what is going on. If you do not know the system used in your industry, ask a friendly competitor how they do it. If they will not tell you, go to a national convention and ask competitors across the country that are not competing head to head with you.

Emotion and the Business Sale Process

You don’t let emotion get in the way of clear thinking, do you? Of course you do. Think about how upset you got the first time someone did not pay you for your services. Or how uncomfortable that employee discrimination lawsuit made you feel. Or many of the other unfortunate things that happen when you have a business.

Think about how excited you made your first big sale. Or when you found the perfect location or many of the wonderful things that have happened as you built your business.

This is emotion plain and simple.

Emotion is an important part of any business business sale transaction. Properly channeled emotion provides the energy and drive to get the transaction done. Emotion can be used in negotiations to your advantage or disadvantage. You cannot completely separate yourself from your emotions when you are selling the business you have spent a major portion of your life building.

Be aware of your emotions as you go through the business sale process. Try not to let them get in the way of getting your transaction completed. That is why we stress that you make sure selling your business is the right thing to do before you begin. We highly recommend that you spend time reflecting on this decision. Review it with your trusted advisors. Make sure it is what you want and need. You will still wake up sweating in the middle of the night convinced that you are doing the wrong deal, but you will get over that sick feeling much quicker.

Never discount emotions. They are the unspoken half of every transaction.