Many business owners have called Meridian struggling with whether to sell their business. Let’s look unemotionally at your decision first and talk plain economics.
If you sold your company, could you earn your salary or more doing nothing? To determine your potential income, look at what the net proceeds would be from the sale of your business. Would the risk-free earnings on those funds be more than your current salary and profits? If so, you should have absolutely no hesitation to having Meridian market and sell your business. In essence, you can free yourself from all ownership risks, the work time, and earn more money with your funds sitting in a risk-free CD or money fund!
Let’s look at a concrete example. A small company we recently valued was in the $5,000,000 sales range. If the owner were to sell, he would need to pay off debts of $2.8 million leaving him with a net of $2.2 million to invest. At just a risk-free rate of 5%, his earnings would be $110,000 per year. As of today, he was paying himself a salary of only to serve very low margin, high hassle, slow pay or high credit risk customers.
Sell more products to existing customers. This holds true for retail and wholesale. When Meridian has surveyed marketer’s wholesale customers, we find most marketer sales reps leave lots of product and service needs on the table, which end up being filled by other vendors. For you to thrive in this low margin environment, you must start meeting 100% of your customers’ needs and look for ways to go even beyond your usual product lines. For retailers, you should focus on gross profit per transaction. Through careful product selection and innovative merchandising, you can increase your average gross profit per customer.
Find new customers. For retailers, ask yourself what customers are not frequenting your stores now and should be? Design an advertising campaign to reach those customers. Your campaign doesn’t need to be pricey. It can be as simple as distributing coupons to a nearby large employer. For the wholesale sector, identify the attributes of your high gross profit customers and then go find more just like them using a very specific and accountable sales strategy.
Streamline internal processes. Instead of focusing on pure cost cutting, which often results in unhappy customers, take a hard look at how you do business. How many steps do certain processes take in your organization? For instance, what number of steps does it take to close out your books each month? Are all the steps necessary? Could some be eliminated through automation?
Create a questioning company culture. Companies where employees are encouraged to question every procedure and process and are rewarded for streamlining and progressive new ideas always thrive. You want to hear, “Why are we doing it this way?” Then encourage your people to invent new and better ways to serve your customers more efficiently while maximizing sales.
Track errors and rework. The typical owner loses at least $100,000 a year to errors and things that have to be redone. Whether it’s store paperwork or re-billing of a wholesale customer, errors, and rework escalate payroll costs. While you build a questioning employee culture, you should also promote error reduction, but not through typical finger pointing and blame. Instead, congratulate people on finding frequent errors and rework, teach them how to track them, discover their true source and celebrate error elimination. It’s not about who is making the errors, it’s about why they occur and how the system can be changed to reduce the chance for error.
Selectively cut costs! Do not cut any expense that has been proven to drive up gross profit or increase customer satisfaction. For instance, you have a yellow-page ad and 14 new customers came from that ad last year at a total gross profit of $70,000. The ad cost was $13,000. Cutting out that ad expense would not be in your best interest! However, switching from your two-way driver radios to a special low-rate cell phone plan has a savings of $5,000 per year, plus your drivers can directly call customers and other drivers at no additional cost. That’s a good expense cut that will save time, save money and increase customer response time.
Finally, reward employees for cost-saving ideas. Most controllers are amazed at the costs they missed when they tackle cost-reduction. By continually asking your entire staff for cost-cutting ideas, you’ll get more done, especially when employees see an associate being paid for a pretty common-sense idea that they could have had themselves!
To summarize, assume that thin margins are here to stay, then, market, market and market! Get rid of errors, mistakes and rework, then involve all your employees in a cost-reduction plan. If you do each of these steps, you will survive thin margins just beautifully.
Meridian Associates has been partnering with family-owned businesses for over 30 years to remove barriers, accelerate business growth, build their legacy, and reduce stress levels. With three, high-impact business events each year, The CEO Exchange, Women in Family Business, and The Family Business Intensive, we continually provide best practices & proven strategies that keep multigenerational businesses thriving. Discover how Meridian can help your business thrive through our combination of high impact business coaching, advisory, M&A, and precision company valuations by visiting www.askmeridian.com or calling us at 817-594-0546.
