Sellers Beware

Selling a business? Volume is down according to the linked NY Times article. It quotes a recent study saying that only 10.5%, or a bit more than one in ten, of companies that are listed by selling brokers actually are sold. The article further notes,

"The main reason (for the low percentage), Mr. Vescio and others said, was that “most small business owners keep bad records,” so buyers cannot get an accurate financial picture."

Take heed, get a part-time accountant or Treasurer and keep good financial records. Get organized and stay that way, you won't regret it.

The Notion of Markup

A retail pricing concept that I have seen used in manufacturing and distribution companies as well, but can be misunderstood, is that of markup. As excerpted by Entrepreneur online, the author Ronald Bond notes that a standard "markup" for retail products is 50%. That is a retailer will double the price he paid for a product, ergo a bottle of rum bought in bulk by a liquor store at $12 per bottle would in this case go on the shelves for $24.

Now, you say, wait a minute, that's a 100% increase. So it is, but it's a 50% markup to the retailer. Why is this standard and justified? Because retailers have costs beyond their direct purchase price. There is rent, insurance, salaries, benefits, heating, lighting, etc. It's a good rule of thumb to consider when selling at retail and this 50% usually results in a net profit margin for the business of 5%-10%.

As a rule it's wise to avoid discussions of markup with your customers, what they need to understand is that you price your offerings to sustain a viable business, and if value meets or exceeds the price they won't care anyway.

Are You Raising Prices Yet?

The National Federation of Independent Businesses ("NFIB") just released it's quarterly look at the economy. Among general signs of a slowing economy, it shows that more than one third of small companies are raising prices - and the issue is inflation to some extent. Is this happening to you? Are you feeling the crunch?

Margins are being squeezed by the increases in raw materials, benefits, and all to do with transportation. Survey participants reflected a 9% decline in sales for the last three months ending April 2008 while earnings were down 28%. Clearly price increases are needed but in a tough retail environment it's not the first thing you think of doing. Yet it must be done.

Witness the micro-brewing beer industry. They have seen price increases of more than 500% on some inputs. As a premium product their offerings have more latitude to increase, but only so far.

Think hard about your competitive situation beforehand, but if it's between losing money and losing a few customers, the latter is probably best. Depend on your quality and service and you will retain the customers who appreciate you the most.

Farm Bill is a Tax on Most All of Us

One of the most egregious handout problems in the US economy is the Farm Bill. Handouts total $50 billion per year, equaling $50,000 per farmer, and the income cutoff is $2.6 million!! I know these folks work hard, but with the handouts their average income is way above the norm in the US.

In a recent The Becker-Posner Blog, Posner writes about this issue. The best near-term solution is to limit the subsidies to farmers at the income level of $200,000 or less. Posner discusses the current offer as proposed by the President, facilely. It probably won't happen, but the Dems should consider it. As I mentioned last time, it will probably take a bold change of leadership to address this kind of intransigent problem.

In the meantime, the extra money given to undeserving farmers is a tax, and an expensive one, on all other industries and persons. This is too big a group to get together and lobby, but too big an issue to continue to ignore.

Can New Leadership Revive Our Economy?

In THE POST-AMERICAN WORLD by Fareed Zakaria, he descibes the declining US influence in the world order, other than our military power. As China, India, and other countries arise, “in every other dimension — industrial, financial, educational, social, cultural — the distribution of power is shifting, moving away from American dominance.” Is this inevitable, or can the US maintain a leadership position, at least in terms of our economy? He has some good suggestions as briefly noted in this interview:

"America is “becoming suspicious of the very things we have long celebrated — free markets, trade, immigration and technological change”: witness Democratic candidates’ dissing of Nafta, Republican calls for tighter immigration control, and studies showing that American students are falling behind students from other developed countries in science and math."

He goes on to decry the intransigence of these issues as quoted by the article's author, " "economic dysfunctions in America today" are the product not of “deep inefficiencies within the American economy,” but of specific government policies — which could be reformed “quickly and relatively easily” to put the country on a more stable footing. “A set of sensible reforms could be enacted tomorrow,” he says, “to trim wasteful spending and subsidies, increase savings, expand training in science and technology, secure pensions, create a workable immigration process and achieve significant efficiencies in the use of energy” — if only the current political process weren’t crippled by partisanship, special-interest agendas, a sensation-driven media, ideological attack groups and legislative gridlock."

Indeed, we have many challenges and maybe a less divicive leadership can help solve these problems, for the better of all and particularly the small businesses in America.