Saturday, February 27, 2010

Increase your small business profits without spending a dime......

I see and analyze hundreds of businesses every year. What I have found is small business owners (generally businesses with less than $3,000,000 in sales) have a consistent weakness that costs them dearly.

The Problem.......

A terrible lack of effort and intelligence in determining the correct pricing of their product or services. In my practice I often see the exact same type of businesses that are often only a mile or two from each other and their pricing is wildly inconsistent and illogical.

Here's a real life example:

I am changing names and details to protect the guilty.

Bill's Auto Service does $950,000 in sales and net profits to the owner, yep Bill, of about $75,000 (it varies quite a bit from year to year)..

Bill called me. He's considering selling his business and would like me to give him my opinion of his business value. Bill is getting ready to retire and is in pretty good shape but he needs to sell the biz for a certain amount to retire. I meet with Bill and go through the usual stuff. Bill has a nice clean biz with no real "deal breakers" that I can see. When I get to the part where I ask Bill about his pricing he gives me a common answer....
Me, "Bill, how do your set your pricing?"
Bill, "after all these years I have a feel for what my customers are willing to pay for certain kinds of repairs".
Me, "do your customers ever complain that your prices are too high?"
Bill, "all the time"
Me, "do they ever complain when your prices are too low?"
Bill, "Are you kidding?"
Me, "How would you know if your prices were too low, let's say on a timing belt change for a Honda?"
Bill, "I guess I'd be losing money, so I'd know."
Me, "how many timing belt's for Honda's do you do in a year?"
Bill, " I'd say 1 every other week..about 25 a year."
Me, "If you were $100 too cheap on that for a whole year would you notice not having that $2,500?"
Bill, "Probably not"
Me, "That's exactly my point."
Bill, "How do you think I should set my pricing?"
Me, "Let's do it right now. What would you charge for replacing a timing belt in a Honda Accord?"
Bill, " $550"
Me, "let's back up 15 minutes. Since I'm not a customer of yours and you said you know what your customers will did you decide on $550?"
Bill, "I get your point, what's next genius?"
Me, "let's get out the trusty phone book and start calling repair shops in your area and Honda dealers."

After about an hour we have 9 prices.. lowest to highest - $425, $475, $520, $550, $575, $590, $600, $675, $800. Remember Joe is $550. The $675 price is the Honda dealer.

Me, "Bill based on this info do you still feel that your price should be $550?"
Bill, "No way, I should be able to get what the Honda dealer gets, I can have the customer in and out in half the time and my warranty on our work is better!"
Me, "What about this strategy? Why don't you price the job at $650 and every time you quote the job you say to the customer..My price of $650 is less than the Honda dealer, I can have it finished in half the time and my warranty is better"
Bill, "that sounds good but what if they go to the other cheaper guys?"
Me, "Bill, those people are already cheaper than you, what difference does it make? Plus if you are making $100 more on each job you can do fewer jobs and make the same amount. You can afford to lose some jobs to the lower price guys."
Bill, "I guess you're going to tell me I should do this for all my work."
Me, "Either you do it or the smart guy who buys your biz will do it and guess what? He will get a bargain because the business is more profitable than you are letting it be. You will sell the biz based on profits lower than what the biz can generate if managed properly, no offense."
Bill, "Maybe I need to do some work if I want to get full value for selling the biz."
Me, "I agree, because I would rather sell your business for more money since I'll make more money!"

The point of this is as a small biz owner you owe it to yourself and your employees to get your pricing right! It's important and it's easy.

I am not kidding, the above is no exaggeration, too many small business owners simply pull out of thin air the prices for their products or services.  Are you that owner?


Friday, February 26, 2010

Special Small Business Administration program for loans under $35,000

Take a look at an SBA ARC loan if you want/need a small loan. Very favorable terms and good flexibility read here 

Monday, February 15, 2010

Small Biz alert ..We're from the Government and we're here to help you!!

Employers should be aware that the Department of Labor is increasing its Wage and Hour Division's enforcement efforts. The Department of Labor has stated that protection of workers' rights is a "top priority" for the DOL. As evidence of that, DOL has added 250 additional wage-and-hour investigators. The intent is to pay prompt attention to complaints about wage-and-hour violations. According to the Secretary of Labor, in the past three months alone, the DOL has collected more than $2 million in back wages owed to more than 500 workers.

Areas of concern to employers include:
  • federal minimum wage, overtime, and record keeping requirements;
  • how to determine which work-related activities are considered "hours worked" and consequently hours for which employees must be paid overtime pay;
  • whether a particular employee is exempt from the Fair Labor Standard Act's minimum wage and overtime pay requirements; and
  • contract labor or employee status.

This post written by Attorney Tom Solomon - Houston, TX

Sunday, February 7, 2010

Is Your Small Business Worth Anything?

In my discussions with hundreds of small business owners, the conversation inevitably turns to the value of their small business. Unfortunately, and far too often, the business owner has no idea why the business has little or no value.

Here's an example (names and details changed to protect the guilty).

Small business owners, Mark and Sue (husband and wife team) call me because they are considering the possible sale of their business.
After much discussion we get around to how the business is doing financially. They have revenues of $550,000 and say they are "taking about $100,000 per year out of their business". Sounds o.k. I ask them if I can have their financial statements and do some analysis to determine what a likely selling price for the business might be. They give me their financials and I head back to the office.

After some analysis and a few calls to Mark and Sue for clarification I determine the following:
The good news......Yes, they are "taking out about $100,000 per year"
The bad news....... The way they are taking out the $100,000.

Here's why:
The business is earning a profit, before Mark and Sue take out anything, of $85,000 per year. But, Mark and  Sue take out that $85,000 profit plus $15,000 more! Where does the $15,000 come from? They owe $15,000 more to their suppliers this year than they did last year! Mark and Sue paid themselves $15,000 of their suppliers money. So how much did Mark and Sue really make? $85,000 not $100,000 because they now owe their supplier the $15,000 as a debt.

So is $85,000 a good profit? Is this case no. Why?
During our interview Mark and Sue said they are working 60 ours a week each and hardly ever get any time off. Let's do the easy math:
60 hrs per week x 50 weeks = 3,000 worked each per year
2 people x 3,000 hours worked each per year = 6,000 hours worked
Their $85,000 income divided by the 6,000 hours worked = $14.17 per hour worked

Does it make sense for Mark and Sue to take the investment risk of owning their small business to make $14.17 per hour? Can't they make more than that working for someone else without the risks?

What would a buyer pay to buy a business where they would make $14.17 per hour? Not much!!!!

Small business owners need to take an honest look at what their business economics really are. Although owning your own small business holds the allure of hitting it big one day, you shouldn't let the dream overwhelm the reality.

The analysis I did above is not rocket science and is very easy for a small business owner to do but I almost never talk to a business owner who's actually done it. Why? Maybe they are afraid of the answer.