Preparing to Sell Your Business -
Improving Profitability

Preparing to Sell Your Business - Improving Profitability

In the last issue (#34), we discussed Preparing to Sell Your Business - Improving Accounting Procedures.  This issue will discuss Preparing to Sell Your Business - Improving Profitability.

A Favorite Famous Quote
"If you don't do it excellently, don't do it at all. Because
if it's not excellent, it won't be profitable or fun, and if
you're not in business for fun or profit, what the
hell are you doing there?"   Robert Townsend

SDE below $100,000 is a major obstacle

The value of your business is primarily driven by its profitability.  In most small businesses there are numerous opportunities to enhance revenues, increase gross margins and reduce costs.  Improvements in each of these areas can result in significant increases in the value of your business.

To gain a better understanding of how small businesses are valued (or to refresh your memory) considering reading this article: Issue #6 - How Small Businesses Are Valued Based on Seller's Discretionary Earnings (SDE).  For many small businesses, every dollar in increased profitability will produce approximately three dollars in increased business valuation.

SDE below $100,000 is a major obstacle

In a previous issue, Issue #33 - Preparing to Sell Your Business - Minimizing Buyers' Risk, we indicated businesses with less than $100,000 in seller's discretionary earnings (SDE) may not be saleable.  If your business is below that threshold, it is extremely important to implement some of the following profitability improvement suggestions to assure you have a reasonable chance of selling your business.

Improve your accounting procedures

In the previous issue there were 6 suggestions to help improve profitability:

1)  stop running personal expenses through the business;

2)  stop skimming unreported cash transactions;

3)  stop expensing capital asset purchases;

4)  improve inventory accounting methods;

5)  improve accounting systems and track business metrics to identify opportunities for improvement; and

6)  review all tax minimization accounting policies and replace with profit maximization accounting policies.

Increase your gross margin percentage

One very significant opportunity to increase profitability is to increase your gross margin percentage - in other words, sell your products or services at higher prices.  Many small businesses are concerned about losing customers over price increases, but if all you are doing is making the easy sale because you have low prices, you are probably leaving money (profitability) on the table.  Dollar increases on the gross profit line of your financial statements usually fall directly to the bottom line on a 1:1 basis.  To read about a real-life example of a business increasing in value from zero to $3,000,000 by increasing its gross margins, read this article: Issue #58 - Low or Inconsistent Gross Margins.

Improve your marketing and sales effort

Many small businesses are stuck in a rut and have significant opportunities to improve upon their sales and marketing efforts - both of which can substantially increase profitability.  Implementing changes in your traditional methods of advertising and marketing (which many small companies don't do at all) can sometimes significantly increase revenues.  Reviewing and changing or updating selling methodologies and techniques can often lead to revenue improvements.  Read this article for more information: Issue #59 - Inadequate Marketing and Sales Efforts.

Develop or improve your website

In today's world, having an internet presence with an interesting and informative website is imperative.  Website development and improvements to existing websites can provide a significant return on a relatively inexpensive investment.

Consider marketing automation

Recent developments in marketing automation offer very significant opportunities to maintain continual contact with your existing customers (to sell them more services and products), to help develop and close sales leads, and to garner new customers.  The opportunities for significant revenue growth through marketing automation are very real, and the cost is inexpensive when weighed against the benefits (which are amazing!).  Because you have to flowchart your selling processes and develop (one-time) written communications, marketing automation can be somewhat complex to implement.  But if you can commit to implementation, the rewards can be astounding!  Although there are numerous marketing automation service companies, consider reviewing the free resources (webinars, reports, videos and articles) at http://www.infusionsoft.com/resources to learn more about marketing automation.

Evaluate cost reduction options

Profitability can also be improved through cost reductions.  Evaluate your staff and eliminate underperforming employees and/or unnecessary positions.  Determine whether underperformers must be replaced, or is it possible their functions can be handled by other employees? Streamline, but do so without impacting the effectiveness of the organization.  Review and evaluate all service and product costs with an eye to reducing expenses.  Eliminate discretionary expenses.  Consider the possibility of renegotiating supplier/vendor pricing.  Is it time to consider obtaining bids/quotes from alternate suppliers and vendors?  On the other hand, the desirability of cutting costs to improve profitability needs to be balanced against maintaining a stable and motivated workforce with positive morale.  In addition, when selling a business, it's important to have positive relationships with your key suppliers and vendors.

Three more ideas to improve profitability

Following are three more ideas that might improve profitability:.....