Ready to Retire & Sell Your Business?
Between 1946 and 1964 Americans created 78 million new people, whom we now call Baby Boomers, or Boomers for short. Those 78 million people believed that the ticket to the American dream was to get a college education and work hard. And they did in record numbers, growing our college educated workforce from 6% to 24%. That created a tidal wave of applicants for corporate America that it just couldn’t absorb. So, Boomers did what Boomers do, continued their endless march for upward mobility by striking out on their own and starting their own businesses.
Today, the first wave of those Boomer business owners are turning 65 and getting ready to retire. They’ve worked hard for 20-30+ years to build their businesses, and they’re ready to have someone younger who wants the same things that they wanted when they started out, to buy their business so they can go enjoy the retirement they’ve always envisioned. Problem is, the next generation, Gen Xers, have very different values than Boomers.
Boomers are workaholics, who grew up as the first generation having a common experience of TV advertising to drive their transformation into consumers of bigger better best of everything. They own 50-60% of small businesses in America, and are consumers for each other’s products and services. Gen Xers on the other hand, grew up using debt for everything they buy, and see work as nothing more than a means to get the lifestyle they want. They are not interested in working long hard hours, and they don’t save so have no capital to buy a business. They see their personal happiness as their number one priority. They don’t equate what they do with who they are like Boomers.
The 48 million Gen Xers will have little interest in a brick & mortar operation that requires them to be on site or on call for most of the hours of the week. Since they have no capital, they will need financing to buy your business, so if your cash flow isn’t enough to support financing, you’ll also have a hard time selling it to a Gen Xer. If they do like your business, and can get financing for it, it’s still a buyer’s market; the market will be short by about 20,000 Gen Xers per year to buy the hundreds of thousands of Boomer businesses to be sold over the next 20 years.
To make things even more challenging, corporate America is catering specifically to the needs of Gen Xers by offering things like flexible hours, job sharing, working remotely, additional paid time off, and flexible benefits. These perks are tough for small businesses to match.
If you’re a Boomer who wants to sell your business in the next 10 years, what do you do? If you want to be one of the few who successfully markets their business, maximizes its value and minimizes taxes, it’s imperative that you have an exit plan.
What’s an exit plan? An exit plan is a strategy developed with the assistance of a team of professional advisors who are experts in their specific area such as wealth managers, attorneys, CPAs, insurance brokers, business brokers, business coaches, and business valuation experts. You’ll look at whether your best option is to sell your business to family members, company employees, or a 3rd party. Then your team of experts will help you create your strategy for what is likely the biggest and most important single transaction of your life. Don’t leave it to chance!
To learn more, attend our next seminar.
Most business owners hope that they have Financial Mastery of their business, but let’s not just “hope”, let’s make certain that you do!
In the ActionCOACH system, the first stage in the foundation level is FINANCIAL MASTERY. Financial mastery is one of the skills, capabilities and tool sets you must have in your business to be successful and ensure that you the fundamental financial insights into your business to help you make great decisions.
Financial Mastery begins with reviewing your business financial reports on a regular and timely basis. You should be reviewing three critical financial reports on at least a monthly basis – your Profit & Loss Statement (P&L), your Balance Sheet and your Cash Flow Statement. These three financial documents will tell the story about your business. Together they paint a powerful picture of how well your business is performing, where your opportunities for improvement are hiding and what the near term future outlook is from a financial perspective. It is critical that you are having these prepared on a timely basis and are reviewing them monthly. In some businesses with high frequency and volume of transactions, it should be weekly. How often do you review your statements?
Once you have your monthly financial reports available, you are in a position to track some Key Performance Indicators. These are important ratios and measures that you can lift from your financial statements and track on a regular basis. You not only want to know where your business is at a particular snapshot in time, but you want to know how your business is doing relative to the past months – perhaps even to the same month the prior years. Have you identified your Key Performance Indicators?
These Key Performance Indicators are best viewed on a Dashboard – a visible set of graphs that tell a story of the health and trends in your business. Your dashboard should be updated at least monthly and should be much like the dashboard of a car – allowing you to look forward rather than in the rear-view mirror. Included in your dashboard should be activities that are not found in your financial statements, but rather reflect your lead generation and lead conversion success rates as well as other delivery and customer satisfaction measures. Is your Dashboard up and visible? Are you aware of the trends in your business? What are the key drivers of your business?
Being successful in Financial Mastery is a partly about your mindset. You must have the disciplined mindset to consistently review the financial data you need to run your business, and the stomach to look even when the news is not good. How can you know who is winning if you do not know the score? As you gain familiarity and the process becomes fast and easy, you can expand your awareness. You can begin looking at the individual profit margins by product or service type, see which of your marketing efforts are paying off most profitably, or you can anticipate cash flow crunches on the horizon – and many more critical metrics.
Nothing should be a surprise in your business. Would you fly an airplane into weather without a solid instrument dashboard and the expertise on how to use it properly? Would you do that if your mindset was not 100%? Of course not! Yet I talk to business owners every single day whose lives ultimately depend on how well their business runs, yet they don’t have the dashboard, systems or KPIs in place to ensure that they and the business are running at peak performance.
The faster you want to go in your business, the better set of financial indicators you must have. Going fast is good only if you have the financial awareness and can read the financial dashboard During this stage of the race, take the time to nail down your Financial Mastery. Expect and demand the regular reports, graphs, metrics and indicators that will let you race even faster – without the fear of not knowing where you are headed or whether you have enough gas!
Get a free business health check to find out where you stand.
In more than 25 years of making pricing decisions and of observing others making pricing decisions, I have come to the conclusion that there is no single business decision that you can make more quickly, but which deserves more thoughtful consideration than the decision of what to charge for one’s goods and services. As a business coach, it still surprises me that business owners and managers don’t do the right analysis before making this critical decision.
If you set your prices too low, you’ll lose money! Set your prices too high and you’ll also lose money! Lets look at an example: if your Gross Profit Margin = 40%, then a 10% decrease (or increase) in prices will decrease (or increase) Gross Profit by 25% (assuming no change in volume). Net profit (what is left after you’ve paid everything) will change even more dramatically.
But wait a minute; if you decrease prices won’t you make it up in volume? Maybe. Using the same assumptions – 40% Gross Margin and a 10% price decrease, since you are selling the units at a lower price and therefore a 25% lower margin, you’d have to sell 35% more volume just to break even on your price discount! You will need a great marketing plan & sales process to ensure more than a 35% increase in volume. And that’s just to break even. Plus you’ll be working a lot harder to produce a 35% increase in volume, to get the same net profit.
Instead of considering discounting to increase your bottom line, think about how you can add value and charge even more. The best way to remove price as an objection by your buyers, is to have a strong and sustainable Unique Selling Proposition. A strong USP will distinguish your business from all the competitors. It will make you the obvious choice in a sea of competition and lead prospects to the conclusion, “I would have to be a fool to do business with anyone but you…regardless of price.” Your USP is something that your competitors can’t or won’t say, that you can uniquely deliver. And it will change the conversation with your prospects from cost based, to value.
USP is a simple concept, but not easy to do. It takes a focused, dedicated process to discover your own USP. It isn’t going to just appear magically. In his book, Purple Cow, Seth Godin explains that the USP must be as remarkable as seeing a Purple Cow. And just like a purple cow, sometimes you have to sit down at the drawing board and create one yourself.
Lisa Walker, ActionCOACH, is a Certified Business Coach who provides services for small and medium sized businesses, helping them to grow and become profitable through the use of proven tools, methodologies, and systems. Lisa targets her clients’ individual needs so they can achieve their goals and realize their dreams.
Increase Profit Margins Now
Welcome to step 5 of the 5 Steps to Increased Profits framework – focusing on one of the five steps each week. As a review, the five key profit-generating metrics are: Lead Generation, Conversion Rate, Average Dollar Sale, Number of Transactions, and Profit Margins.
I’ve highlighted the five keys in the following equation:
Avg. Dollar Sale
Avg. # Transactions
I talked last post about the importance of ensuring you boost your number of transactions, which is another way of measuring customer loyalty – or repeat business. This week we focus on how to increase profit margins – because that IS the bottom line. Who cares how much revenue you’re generating if there is nothing left at the end of the month, you’re just working too hard for nothing.
Profit Margins are critical to your overall profitability. You can have a fast growing or high revenue generating business but without acceptable profit margins, all of your growth efforts will be for nothing. It is critically important that you not only know your overall margins, but you must know them by product or service type.
Why is this so important? Because you want to promote your highest margin products and services whenever you can. These are the game-changers for you. These products and services are the ones that provide the resources to cover your costs and provide you with resources to invest in your business.
There are two primary ways you can improve the Profit Margins in your business – reduce your expenses or raise your prices. Most cringe at the thought of raising prices, especially in fragile markets, but if you have done the hard work of creating a Unique Selling Position and have truly differentiated yourself from your competition, and know your target market extremely well, then raising your prices may be an option – but don’t do it blindly.
It is mainly fear of the unknown that keeps business owners from taking the bold step to increase their margins through a price increase. Know your numbers, your market, your customers. Studies have shown that your loyal customers are not doing business from you because of price alone. Most will understand and appreciate your rationale and will remain strong, loyal customers – that is if you have treated them like they were special and found ways to deliver MORE than they expected of you.
Cutting is costs is often times easier, but not necessarily the right move to make when you are trying to grow your company. Eliminating waste is always good, but often times expense cutting comes in the form of eliminating services, reducing marketing programs designed to grow your business, or reducing staff and degrading your ability to deliver on your promise. Be careful not to impact your operational efficiency and speed of delivery when reducing your expenses. The last thing you want to do is to become a “me too” business simply because of your efforts to cut costs.
Now, with that caution in mind, there are always ways to gain efficiency and reduce the effective cost of your system. Toyota and other large manufacturing companies, are masters at eliminating costs through waste reduction, efficiency gains, reduced work in process inventories and unnecessary movement of people and supplies. If they can do it, so can you. When was the last time you critically evaluated your business operations with an eye towards gaining efficiencies and reducing unnecessary steps on your process? Creating systems for your business is a powerful way to reduce your costs –while at the same time, improving your productivity and customer satisfaction. If you are not familiar with the tools and techniques for doing this, drop me a note and I will direct you to them.
The challenge is to first know your margins, then be purposeful about improving them on a regular and steady basis. The trend for your margins should always be favorable. While this is the last of the 5 Steps, it’s actually the one you should work on first (now she tells me!). Work hard on this last segment of the Business Chassis and you will position yourself for phenomenal growth and incredible profits!
Discounts vs Profits – How discounting affects your bottom line.
Do you have (or have you ever experienced) one of those salespeople who thinks that giving a discount is the easiest, quickest way to make a sale? Of course, they may be right, but what about the profit (your profit) they’re giving away?
If your product has a profit margin of 30% and your salespeople give a 10% discount to make the sale, you’re losing a massive, one-third (33%) of the available profit!
During a seminar for the buyers of a large retail group with branches all over the country, an attendee shared the following tactic: “My job is easy. I just let the salesperson make a full sales presentation. I ask questions and listen to their explanations. When they’re finished, I simply say, ‘I’d like to place an order with you, but your prices are too high…’ and I then simply sit there and enjoy myself, because the once-confident salesperson suddenly doesn’t know what to do or say next. With much less conviction and enthusiasm, they may repeat the benefits and features of their products, but most of them get in to see me by giving me a lower price in the first place. Whatever new price they offer, I usually respond by saying, ‘You’ll have to do better than that!’ And more often than not, they do…in fact, do better than that! I get lower prices by just sitting there, enjoying the game!”
If you are selling, or have others selling for you, you must protect your price and your margins. Teach your sales people to talk about the unique benefits of buying from you, and not to hesitate or stutter when a buyer insists on a lower price. Start negotiating! Start using tactics to hold firm on your prices. Sell value…perceived and real
Do you think it’s possible to work 50% less and earn the same income from selling? You bet it is! Here’s how:
Suppose your company sells pumps, with selling price of $10,000 per unit. Assume that your net cost per pump is $7,000. That means that the net profit on each pump would be $3,000. If you sell ten pumps at the full price, the net profit for your company will be $30,000.
Compare this with selling ten pumps, but this time at a discount of ten percent. The total selling price for ten pumps is then $90,000. The net cost for ten pumps remains at $70,000. The net profit has decreased to only $20,000 compared to the original transaction $30,000 where no discount was given. With only a 10% discount you’ve just lost one-third of your profit.
If your company continued to sell at ten percent discount, then you’d have to sell 15 pumps to achieve a net profit of $30,000. Here’s how it looks:
Sales Discount Gross Sales Net cost Profit
10 0% $100,000 $70,000 $30,000
10 10% $90,000 $70,000 $20,000
15 10% $135,000 $105,000 $30,000
What lessons can you learn from this example?
A ten percent discount means your company must sell 50% more units (15 instead of 10) to earn the same profit dollars.
A ten percent discount means someone has to work 50% harder to earn the company the same dollars.
By not giving discounts, in essence the company can “work” 50% less and earn the same income.
In spite of this, you might still think, “But, if I don’t give discounts, I’ll lose sales! It’s an industry norm to give them…everyone does. If I don’t give discounts, they’ll go to the competition!”
And you may, of course, be right. You may lose a few deals if you don’t give discounts… but the good news is you can afford to…and still make the same or more profit. OR, you can work on your Unique Selling Proposition so that your customers see the value you uniquely offer, and are willing to pay for it.
What’s the best bet for keeping score in a winning business?
Technology in sports today is increasingly sophisticated and enables monitoring of individual and team performance to levels unheard of even 10 years ago. We now take basic score keeping for granted and we see an instant array of data available for immediate analysis and magic eyes to challenge the decisions of human score keepers, umpires and referees.
In business it is much the same. In organizations large and small, or any fast-moving workplace, how easy is it for any of us to forget to do the basics? Many extremely useful business metrics don’t require any technology, other than simple personal discipline to test and measure, every day, every week and every month. It seems like a major undertaking at the start but like many tasks, when organized, established and routine it takes just a few minutes a day. The benefits of keeping score are eye-opening and powerful.
A “Dashboard”, just as the one in your car that tells you what’s going on, will give an instant perspective on your business’ performance for the previous week or month. The content will vary from business to business, however typical content might be as follows for the past week:
Keeping Score – Sales:
How many Leads did you receive?
Where did they come from by source? (eg referrals, website, print ads, telemarketing)
How many unit Sales did you make?
What was your Conversion Rate?
What was the Revenue of your Sales?
What was the Average Value per Transaction?
Keeping Score – Financials:
Did you hit your weekly Breakeven?
What was your Gross Profit?
What were the Cash Receipts?
How many Debtor and Creditor Days did you have at the close?
Keeping Score – Operations:
How many Direct Labor Hours were available for production or service delivery?
How many Direct Labor Hours were invoiced this week?
What is the Measure of Time Expected versus Time Taken on jobs and tasks?
What is the Percentage Right First Time?
What was the cost of Waste?
It’s tempting to focus on the completion of a “Dashboard” as a goal in itself. However without regular review there is no reflection on the wins, challenges and learnings for the week. It makes sense to set time aside to do this at a regular time each week and compare the results with pre-set targets which are stretching yet achievable and realistic. Some of these might be “Key Performance Indicators” looking at activity, whereas some will be outcomes or “Key Results Indicators”.
Measurement of Operational Performance can become more complex, however the simple difference between paid for labor hours and billable hours that appear on invoices (when multiplied by charge-out rate) may give a Blinding Flash of the Obvious in terms of lost profit each week. Maybe there is a need to generate more orders to fill the capacity? Maybe there are overtime costs that you can reduce? Or perhaps it’s a timely reminder to just raise the bar in productivity and re-engage the team.
Whether there’s a need to focus on more sales activity, sales performance, more marketing effort, better cash collection systems, or operational efficiencies, the old adage applies: “You can’t manage what you don’t measure”. Need help with setting up your dashboard and keeping score? Get in touch with me.