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.