Inflation appears to be easing a bit for the first time in a few years. That’s good news for everyone, including business owners, who have been struggling with rising prices on everything from gas to equipment to labor.
Inflation has also had an impact on consumer and business behavior. Both your residential and commercial customers may have reduced their frequency of service or even canceled altogether. So this next piece of advice is going to feel counterintuitive, if not downright wrong: you probably need to raise your rates.
If you’re thinking about selling your business in the next few years, raising your prices now should be part of your exit strategy. Here’s why.
Many business owners hate the idea of raising rates because they fear their customers will move on to other vendors. And it’s possible that some will. But if you’ve been delivering reliable service and taking care of concerns and problems, most of your accounts will stay with you. Everyone understands that the cost of everything has been going up, so they will not attribute price increases to simple greed – especially if you explain it well.
If you haven’t adjusted your pricing in a few years, it’s almost certainly affected your profitability. And it’s important to remember that Seller’s Discretionary Earnings (SDE) is the most important factor in how valuable your business is for a buyer. Investors and buyers will look at 3 – to 5 years of financial trends, and yours may not look healthy. Even if your revenue has remained steady (or increased) over the past couple of years, if your profitability has decreased, you are losing value in your company.
There’s a science and an art to raising your rates. The science consists of understanding your costs and profit margins. Many small business owners dislike bookkeeping, and frankly, it’s a serious weakness in their company. If you don’t work from a written budget and simply pay bills as they come in, you may not have a solid understanding of how much you’re spending and how much you’re clearing each month. Getting a handle on these numbers should be job one.
Once you understand your budget, you can see where you could save money. Eliminating unnecessary costs or finding less expensive ways to provide service can make a big difference over time. You don’t want to cut corners, of course, but you can probably gain some profit back through efficiency.
Once you’ve worked your expenses, you’ll need to consider what it will take to get you back to your target profit goals. We advise business owners to raise prices enough to cover costs and their margins, which probably means a pretty large increase. This is where the art of raising prices comes in. You’ll need to first, thank your customers for their business, then explain why you’re making this difficult decision. Give them a date for the increase that’s a few weeks in the future, so they have time to adjust their own budgets.
You’ll also need a good marketing plan in place so you can replace any customers who decide to look for another service. The good news is that you’ll be replacing price-sensitive accounts with ones that can afford the higher rates. Your business will become healthier over time.
If you do the hard work now, your business will be more attractive to a buyer. They’ll appreciate that you took this step when you had strong customer relationships. The new owner will not have to take over and raise prices immediately after taking over without any of your existing goodwill.
Improving efficiency and profitability will increase the value of your business in the long run, so the investment will pay off in multiples when you’re ready to sell.
If I can help you analyze your profitability and determine what your company might be worth in today’s market, I do offer a complimentary and confidential opinion of value.
About the author: Jim Parker
Jim Parker is an experienced business broker specializing in lawn and landscape businesses. His company is based in Clermont, Florida. As an industry leader, he has served as the past president of the Business Brokers of Florida and currently sits on the International Business Brokers Association’s Board of Governors. Jim is a sought-after speaker who he teaches others in his industry best practices in ethics, closing transactions, and finding qualified buyers. He has earned over 50 awards and recognitions in his career.
He is a Certified Business Intermediary (CBI), Certified Mergers and Acquisition Professional (CMAP), Masters Certified Business Intermediary (MCBI), and is a Mergers & Acquisitions Master Intermediary (M&AMI. He is one of one of less than 20 business intermediaries in the world that have all four of these designations. To contact Jim, visit TheLawnBoss.com or call (407) 927-8999.