June 2012

Considering selling your business? Just want to increase the value of your business? Here are some areas to look at that can fairly quickly increase profits, which are, after all, a main building block in creating value.

•    PRICING: Are the prices of the products or services set too low? Owners too often continue with the same prices year after year without revisiting their pricing structure.

•    CUSTOMER SERVICE: Despite all of the above Elevating the quality or amount of customer service may not only increase business and support the higher prices suggested above, but also encourage customers to pay more promptly, increasing cash flow.

•    EXPENSES: Owners should review what they pay for inventory, supplies, utilities, insurance, technology and any other expenses. Are you getting the lowest price possible? Are you taking advantage of all available discounts, etc.? It may pay to check pricing from other suppliers and vendors. Every saving increase profits and subsequently profits.

•    INVENTORY: In some cases inventory levels may be higher than necessary. Retail operations want their stores to look “busy,” but they don’t need a basement or warehouse full of inventory. In today’s fast-moving economy, inventory can be supplied almost on demand – in most cases. This should be balanced by still taking advantage of special pricing on certain items or stockpiling hard-to-get inventory.

•    OUTSOURCING: Some services, especially in today’s environment of the self-employed, can be outsourced. While replacing workers is not pleasant, and should only be done if substantial savings can be realized, outsourcing is often worth investigating.

•    EMPLOYEES: Now may be the time to get rid of any disgruntled employees. Happy and contented employees make for a profitable business.

These are just a few areas to consider to help increase profits and, subsequently, increase value.

Prospective buyers don’t want to hear about “what the business really makes” – they want to see the books and records that show what is down in black and white. Here  is the old story about proper accounting procedures, or lack of:

A Greek restaurant owner had his own bookkeeping system.  He kept his accounts payable in a cigar box on the left-hand side of his cash register, his daily cash returns in the cash drawer of the register, and his receipts for paid bills in a shoe box on the right side of the cash register.  When his youngest son graduated as a CPA, he was appalled by his father’s primitive bookkeeping methods.  “I don’t know how you can run a business that way,” he said.  “How do you know what your profit is?”

“Well, son,” the father replied, “when I got off the boat from the old country, I had nothing but the clothes on my back.  Today, your brother is a doctor.  Your sister is a speech therapist, and you’re a CPA.  Your mother and I have a nice car, a city house, a country house, and plenty of money for retirement.   We have a good business and everything is paid for.  Add all that together, subtract the ‘clothes on my back,’ and there is your profit.”

Great story and it is probably an accurate depiction of many small businesses, even in today’s world. Unfortunately, today’s buyers are not going to buy a business—not for anywhere near what the business may actually be worth in the marketplace—without checking the books and records. Buyers will not pay for what they can’t see. Some sellers want it both ways. Since they haven’t reported this income to anyone, they haven’t paid taxes on it; and now they want to sell it as a real number. They also seem to forget the most important part – “skimming” is against the law.

Joseph Bankman, a professor of tax law at Stanford University Law School said, “Nothing is as good as taking half your income off the books to start with; that’s better than any phony deduction. That’s the biggest single source of revenue loss in the tax system.” What these sellers may fail to realize is that the Internal Revenue Service (IRS) has audit guides for many different businesses. It tells them, for example, how to roughly calculate annual sales and expenses of a pizza place by tracking its purchase of cheese. Any seller who doesn’t think that the IRS can’t figure out income and expenses of most businesses is kidding herself. Too many small business owners think that they are getting away with it – but they just haven’t been caught yet. If they kept accurate financial records they probably would get a much higher price for their business, most likely making up for more than what they would have skimmed.

What happens is this: a business owner gets ready to sell, realizes that due to his or her unreported financial dealings, the business won’t sell for anywhere what he had hoped for. Now he is in the position of having to reveal to a prospective buyer how he is skimming from the sales, paying help under the table to avoid the usual employee costs, or padding expenses. Buyers do not look favorably on sellers who attempt to justify their price by revealing how they are cheating the government(s).

Here are some tips for business owners who are considering selling:

•    Plan now to maintain accurate financial records. When it comes time to sell, you will be able to show a prospective buyer where the money is and what it was used for.

•    Keep in mind that a selling price is usually based on the cash flow of the business. The dollar you hide today will most likely be worth two or three times that when it comes to selling price. Think long-term, not short-term.

•    Talk to a business broker professional. He or she can provide some education about  how businesses are priced. They can also offer suggestions on how to gather the necessary information for a prospective buyer.

By following the suggestions above and reporting all income, by taking only legal deductions and maintaining accurate financial records, when it comes time to sell and the buyer says “Show me the money” – you can!

Naturally, sellers want the highest price they can get for their business. In come cases, however, it might not be the best deal. For this reason, every offer should be scrutinized carefully. When an offer is presented, the first thing a seller looks for is the price. If it is lower than anticipated, the seller’s first reaction is to give it back, initiating the case for its being much too low. A seller should consider an offer carefully and avoid a hasty reaction.

Here are a few alternatives that might offset a lower price:

•    an offer with no or very few, and easily satisfied contingencies
•    a consulting agreement or other deferred compensation
•    a quick closing
•    all cash, if that’s important
•    employment contracts with relatives or long-time employee(s)
•    business vehicle to remain with the seller
•    buyer has a long success record indicating long-term survival
•    short-term payment period if seller financed

When a professional business broker is involved, he or she can point out those areas that may offset the price, down payment or the structure of the deal. After all, the important thing is not what a seller gets, but what he or she gets to keep!

A recent survey revealed the following percentage breakdown of last year’s business sales by business types. The information was furnished by business brokerage firms nationally and compiled by Business Brokerage Press.       

Figures rounded

Service type businesses include dry cleaners, quick print, video stores, etc.  Other businesses include coin laundries, delivery, product, and vending routes, and any that don’t fit into the other categories listed.

What does this mean to you as a business owner?  It indicates that service type businesses seem to be creating the most activity from business buyers, followed by retail and the food and drink sector.  The service sector has also been the leader in businesses sold by business brokers for the previous two years. This coincides with the growth nationally in the service sector coupled with the broad range of businesses included in it.

The food and drink sector, which includes restaurants, fast-food, taverns and the like, has always been a popular one for buyers. One reason is that most people frequent these types of businesses on a regular basis and therefore are familiar with them. Plus, there has always been a certain “celebrity” status connected with this sector.

However, statistics aside, today’s buyer has more knowledge, experience and education than ever before and is willing to consider almost any type of profitable business.

The most recent editions of BizComps, the leading resource for comparable sales data (www.bizcomps.com ) has some interesting information on small business pricing based on the three major regions of the country – Eastern states, the Central states and the Western states.  They cover thousands of actual business sales over a ten year period.  Here is the breakdown:

Location                        Average Sale Price

Western states                    $299,500

Central states                    $221,951

Eastern states                    $285,941

Using the Western states as the base, since that region of the country has the highest average price business, businesses in the Central states sell for 74 percent of the average price in the Western states; and the average price in the Eastern states is 78 percent of the Western states average.