Are You Charging Enough for Your Goods and Services?

/in /by

Competitive PricingOne of the themes we often discuss in these articles is the failure of most business owners to think appropriately about the selling price of their businesses.  Very rarely do we meet a business owner who is aligned with reality when it comes to what their business will fetch in the marketplace.  But that might be part of a larger problem: pricing in general.  In this article we’ll revisit what you should keep in mind as you price (or reprice) your products and services.

Cost-based Pricing

Many businesses use cost-based pricing.  They take the cost they pay for something and add a fixed number or percentage of the cost on top and voila, you’ve got the price.  There’s a lot to like about this:

  • It’s simple – no complicated formulas
  • It ensures profitability – you know that you aren’t losing money on any product
  • It helps with bidding on projects – when asked to put forward a proposal one part of your calculations will be straightforward

Value-based Pricing

There are companies that base their pricing not so much on their costs, but on what the customer is willing to pay.  An Hermes bag or an Aston Martin car are the most obvious examples, but it’s not just luxury firms that use value-based pricing.  There are two keys in value pricing:

  • A product or a service that is clearly differentiated from the competition – there must be at least one aspect that is difficult for competitors to emulate well
  • A focus on customers that allows improvements or features to be added based on their desires – this implies open communication and strong relationships with customers

A Hybrid Approach

McDonalds is one of the most successful businesses in the world, not just in its corporate profits but at the individual franchise level.  They use a combination of cost-based and value-based pricing.  For example, the margins on burgers are fairly low or sometimes, during promotions, non-existent, as the burgers may be loss leaders.  Where the margins are unbelievable are in beverages, specifically coffee and sodas, and in their famous fries.  

As the single largest buyer of potatoes in the United States, McDonalds can almost, in a way, engineer the final price of their fries.  Sitting together in an Extra Value meal you have products with wildly different margins.  McDonalds has used research to extract the maximum price out of each item, but you can see the philosophies of cost-based and value-based pricing operating in the background.  Many places offer burgers, so McDonalds has to offer those burgers at competitive prices, but they have poured so much marketing into their fries that McDonalds fries command a premium: people are willing to pay more for McDonalds fries than for another brand, even if they know that ultimately we’re just talking about fried potato sticks.

Are You Charging Enough?

If you have a business which uses cost-based pricing, are you looking in your blind spots?  Are you examining opportunities to curb costs not just with individual products but with the system in general?  Are you monitoring the marketplace and in particular, your competition, to see what you’re up against?  Complacency kills.

If you have a business which uses value-based pricing, you are dealing with a smaller customer base, hence, are you making sure you are reaching your entire total addressable market (TAM)?  Also, are you missing opportunities for cost savings simply because you have been doing things in the same way for a long time?  Are you continuing to innovate so that you aren’t just sitting on your laurels, thinking that no one will ever be able to replicate what you do?

We’ve said before that it’s the small tasks that add huge value to businesses, and there’s no need to leave a lot of money on the table for a future buyer to scoop up just because you weren’t willing to do the work to make sure you were charging enough for the hard work of you and your team.

Remember, pricing isn’t a decision you make once and leave alone.  It’s one of the key drivers of value in your business, and needs to be tended consistently.

Do you think you might be leaving money on the table by not charging enough for your products and services?  Would you like a second set of eyes to help you look at the numbers?  Give us a call.  We’d love to help!

6 Reasons You Should Consider Hiring a Business Coach

/in /by

6 Reasons You Should Consider Hiring a Business CoachThe top performers in many fields, from the arts to sports to finance, use coaches.  They don’t just have coaches in order to be the best: they want to stay the best.  It’s no different for business owners.  If you want to be playing at the top of your game, you should consider hiring a coach to get you there (and keep you there).  Let’s talk about some of the reasons why.

1.  What Got You Here Won’t Get You There

While it would be nice to imagine the business building journey as mostly an upward trajectory from zero, there are many bumps along the way.  At some point you may find that your sales have stalled or your margins have eroded.  You’ve gone as far as you can go on your own and all the signs point to needing help.  A business owner has to have the humility to ask for help and the willingness to grow beyond his/her current capacity.  A coach can help you take a hard look at what is missing and offer solutions to fill that gap.

2.  Accountability

We’ve discussed how an advisory board can help you stay accountable and grow your business.  But they can’t meet with you every month.  A business coach can.  He/she can help keep you accountable to goals and tasks you set together.  We know it can be easy to break promises to yourself.  A coach doesn’t let you do that.

3.  Objective 3rd Party

While your spouse, business partner, or even a key employee may be able to help you with some of these issues, they aren’t objective parties, and adding this dimension to your relationships with them can cause unnecessary strain.  A coach isn’t emotionally or financially tied to your business, hence he/she can offer more objective advice.  They aren’t within your organization, so they aren’t influenced by forces and emotions that can sometimes make it difficult to see and diagnose issues.  Outside perspectives matter.

4.  You Have Specific Issues

There are many tasks that a business coach can help you with:

  • Exploring different directions for the company
  • Calibrating marketing and pricing
  • Hiring a new key employee
  • Examining company culture and retention
  • Giving a second set of eyes to your financial statements
  • Advising on exit strategies 

As each month and quarter ends, you’ll be able to deal with issues as they come up instead of resigning them to that mental pile of “I’ll deal with that later” (“later” here can often mean “never”).  A coach can help you work step-by-step through what seems to be large and complex issues: breaking down the elephant, one bite at a time.

5.  You Feel Stuck

Things could be going well for your business, but you just feel that you need to grow in areas that you aren’t world-class in.  This could be negotiation, management, or leadership, just to name a few areas.  Of course there are plenty of great books and courses out there these days to help, but a coach can give the sort of personalized and focused attention that they can’t.

6.  Steam Valve

Let’s be honest.  Sometimes as entrepreneurs we just want to blow off some steam.  Perhaps it’s a vendor who hasn’t been paying on time lately, or a business partner who hasn’t been communicating well, or a troublesome employee.  Whatever the challenge may be, we sometimes just need a way to let off some steam.  Coaches can help you do that.  But even better, once that steam has been vented, they can help you navigate to the root of the problem and try to solve it.

Need a business coach but don’t know any?  We happen to know a few, and some that we’ve used for our own businesses.  Give us a call and we can connect you.

New SBA Relief Funds Available for 2021

/in /by

New SBA Relief Funds Available for 2021Many who were holding SBA loans in 2020 saw their interest and principal payments automatically made for six months due to provisions made in the CARES Act.  Some new funding has been released for a second version of this program in 2021.  But changes have been made by the SBA in February, so we wanted to ensure our readers got the most current and accurate information.

The 2020 Program

The original program was backed by $17B in funds.  The new program included guidance on the loan payments made by the SBA in 2020, and the news is good.  Not only were those payments made on your behalf not taxable, but the interest and fees paid by the SBA are now deductible!

The SBA programs that were eligible included:

  • 7(a) loans (general small business loans up to $5M, and the loan type that is the majority held by the SBA)
  • 504 loans (major fixed assets/real estate loans up to $5.5M)
  • Microloans ($500-$50,000 small business loans)

The 2021 Program

The new funding is derived from a bill that passed in the final days of 2020 and had promised the same six months of payments by the SBA for all new loans all the way until the end of September 2021.  Ostensibly this would be one more incentive for people considering buying a business to make a decision: the government was offering free money to make that leap.

If the loan was fully disbursed on or before September 27, 2020, it was eligible for the original six months under the CARES Act and the previous program.  Any loans that were fully disbursed after September 27 would come under the 2021 program.

The 2021 program also noted that those in particular sectors could be eligible for up to an additional five more months of payments, namely:

  • Food service
  • Accommodations
  • Arts and Entertainment
  • Recreation
  • Education
  • Laundry
  • Health Care

However, it seems that over the holidays somebody in the SBA was actually running some numbers and realized that the paltry $3.5M allocated for this second round could not possibly deliver on the promises.  So, in mid-February the SBA sent out a procedural notice.  As government documents go, it’s surprisingly readable and thankfully short.  But in fairly straightforward language we read:

SBA has determined that the $3.5 billion that was appropriated to carry out Section 325 of the Economic Aid Act is insufficient to make the payments for the periods authorized by Section 1112(c)(1) of the CARES Act, as amended by Section 325 of the Economic Aid Act.

In other words: we’d like to give you more money, but we know we won’t be able to.  The document goes on to shorten the promised six months of payments to three months for any new loans, and a possible three additional months (instead of the five previously discussed) for those impacted sectors.  

The document also lists all the NAICS codes that are eligible for this program.  In case you didn’t know, a NAICS code is used by the government for statistical purposes and puts industries into neatly organized codes.  812111 is the code for a barber shop, for example (also one of the codes eligible for the program).

Who’s Eligible?

If you get a new SBA loan in one of the categories listed above between February 1 and September 30, 2021, the SBA will make your payments subject to funds.  That means you could get a loan by July or August, well before the deadline, and still miss out because the SBA has no more money for this program (unless more funds are allocated for this program before then).  So, that means if you’re interested in this “free government money,” you’ll need to move quickly.

To get an SBA loan you don’t have to prove the decline in revenue necessary to qualify for the second round of PPP funding, but you do have to show you have been unable to get credit elsewhere.  Ironically, those who weren’t previously eligible for SBA funds may now be eligible because the financing options they once had have disappeared.

Need some bankers who are familiar with the SBA to help you navigate this?  We know some great ones.  Give us a call and we’ll connect you.

Case Study #48: Believe in Your Business

/in /by

Believe in Your BusinessLong before he bought and built Capitalism.com, Ryan Daniel Moran was building small online businesses, which was one of many experiences he shared in his Freedom Fast Lane podcast.  One of those businesses led to what should have been an 8-figure exit, but due to his inexperience it became a 7-figure exit instead.

While today you may know about huge businesses being built on the Amazon platform, in 2013, when Ryan and his business partner spent $600 to get started, that world was still developing.  They built a company called Sheer Strength, which provided supplements to the body builder market.  Ryan was the visionary and his partner Matt was the integrator.  Their secret sauce for Sheer Strength was learning and owning keywords in the Amazon algorithm for their product categories.  That sauce paid off: at the time of their sale they were doing $10M in topline revenue annually with EBITDA of $3.2M.

End of the Road

Ryan and Matt felt that they had built the business to the limit of their capabilities, and for the company to get to the next level, they would need to bring in experts who could help scale and grow the company.  They felt that they could get six times their EBITDA and were looking for a company who knew the nutrition and supplementation space and had grown a smaller company before.

Ryan had never sold a business before, so he took the first serious LOI that came his way and entered a diligence period with the potential buyer.  They looked at the numbers and decided that the EBITDA was not $3.2 but $2.9.  Given that represented a $2M swing in the valuation, Ryan says now he should have stepped back and gone back to market.  But he didn’t know what he didn’t know, and worse, he didn’t realize that he had the asset: these were people with a lot of money who wanted to invest in something worthwhile.  Ryan didn’t understand how worthwhile the company he had helped to build was.

Sale

Ryan and Matt did end up selling to the buyer they had entered diligence with, even with the lower valuation, and they sold 60% of the business and left the remaining 40% in so that they could stay on and help the company grow.  

But a shift of values happened.  Instead of a focus on service to the customer, they found that the buyers had a focus on profits.  Instead of being nimble, humble, and gritty (the culture that brought them their success), the new company was big, structured, and arrogant.

The big problems were threefold:

  • Clueless management were hired
  • Serious debt was laid onto the company as part of the financing of the purchase
  • The clueless management was found out and fired, but then equally clueless replacements were hired.

Before too long, the new entity that had been created went bankrupt, and even though Ryan and Matt made a very aggressive offer to the bank in order to try to buy back control, the bank went a different direction.  The 40% they had risked to grow the business evaporated.

Lessons

Ryan puts himself forward as a cautionary tale but is happy to have learned important lessons in this transaction that help guide the way he does business now.

  1. Believe in your business.  You’ve built something great and are now on the verge of a life-changing transaction.  Know your terms and believe in your numbers.
  2. Be willing to walk.  If you’re not happy with the way things are developing, always be mentally ready to walk away from a bad deal.
  3. Find the right buyer.  Don’t just take the offer that comes with a lot of money.  When you want to grow the business, find a buyer who is aligned with your values and management philosophy.

Are you looking for a buyer to work with in order to take your business to the next level?  We know people looking to do just that.  Give us a call today!

The Value of an Advisory Board

/in /by

Advisory BoardEvery day, small business owners face challenges that they need help solving.  Sometimes their teams can assist, but other times these challenges may be in areas in which everyone lacks expertise, or simply lacks experience.  At these moments objective and experienced voices can help small businesses to solve problems, grow, and thrive.  Those voices can and should be part of your business’s Advisory Board.

What is an Advisory Board?

Don’t be scared by the term “board.”  This is nothing like a board of directors, with formal legal and fiduciary responsibilities.  This is simply a group that meets on a regular basis to “advise” on matters that you need help with.  

What is it For?

An Advisory Board is a toolbox with many different tools inside.  Typical activities at an advisory board meeting could include:

  • Examination of current financial statements
  • Critique of a planned marketing initiative
  • Postgame of a new product/service launch
  • Discussion of a challenging team member

The advisory board allows business owners to speak their minds: there’s no employment relationship here so there’s no reason for any of the parties to hold back.  

How to Build One?

If you aren’t a hermit and are regularly circulating through your business community, you probably already have the contacts necessary to build a board.  You’ll want to keep it small, somewhere between three and five members altogether.  While it would be ideal to have at least one person with some background in your industry, don’t be afraid to have board members who have never had anything to do with your industry: outsider perspective is valuable.

You may also want to avoid tapping family or close friends: we all know the dynamics of interpersonal relationships can sometimes lead to people failing to say what they should in any given situation.  Business is no different.  

What’s the Plan?

Before you invite anybody to do anything, start with why.  Why are you putting this board together?  Perhaps you are frustrated with your growth rate and aren’t sure why things are stagnating.  Maybe a part of your business is really broken and you don’t know how to go about fixing it.  Maybe you’re completely happy with your business and you simply want to make sure you’re doing all the right things and covering every angle.  Again, keep it focused: don’t write down every single reason you want an Advisory Board: one to three will do.

Once you know your why, think about when.  How often would you like to meet?  Monthly is a bit too frequent, and annually is not really that helpful.  Quarterly or every six months is best.

Finally, think about how you’d like to compensate your board members.  Very often people will be honored to be asked to help you with your business and won’t expect or demand compensation.  That said, it’s important to honor someone’s time and the compensation can be as simple as food at the Advisory Board meetings and occasional gift cards or thoughtful presents throughout the year.  These people are giving you their valuable time and expertise: respect that.

How Does a Meeting Run?

Like most meetings, you might want to just have some time for people to arrive and relax, and of course at the very first meeting, people will need to introduce themselves and their connection with you.  After that social time, you can start the business part of the meeting.  Deal with the “must cover” topics first but also leave time for other less important topics. Be okay with disagreement, even passionate disagreement.  Let everyone know from the start that it’s not about winning arguments but about sharing ideas.

Ideally you, the business owner, should be taking notes.  This forces the meeting to slow down while you articulate in your own words what you are hearing and make sure that everyone agrees.  Those notes should be shared after the meeting and in between meetings you may want to offer a periodic short update on a particular matter.  The Board should not only be hearing from you when you summon them to a meeting.

Last Things

You’re going to be dealing with sensitive company information, so each of your board members should sign a basic NDA.  Also, don’t be disappointed if someone you ask to be part of your board declines: instead, ask if he/she might know someone who would be a good fit.  Finally, check your ego at the door before and after every meeting.  These people are here to help you, not attack your baby.  Don’t take things personally: strive constantly to see things from their perspectives and hear them out.  You just might learn something.

Want to build an advisory board but feel like your network is a little thin?  We know a LOT of people.  Give us a call and see if we can’t help you fill those seats.