Articles

Business Tips From the Editor -August 2024

BUSINESS TIPS FROM THE EDITOR

August 2024

Richard T. Hendee, Editor
The Silver Fox Advisor

         “SMALL BUSINESS OWNERS’ BIGGEST CONCERNS”

As I was thinking about a topic to write about for the August 2024 Business Tips article, I googled “What are the biggest concerns of small business owners,” and I was not surprised to find that inflation appears to be the major concern, by far, of most small business owners.

Inflation can affect so many areas of any small business. On the revenue side of the income statement sales can be reduced because the business’ customers do not have as much cash available to purchase their goods and services. Or, the products and services the business sells to other businesses are not being purchased as much because their sales are also down.

Additionally, the business may not be able to increase its pricing as fast as expenses are increasing because its customers simply may not pay the increased pricing and seek similar products or services from other sources at a cheaper cost.

A business’ Cost of Goods Sold typically increases in an inflationary environment due to increases in their own or suppliers’ raw materials, manufacturing, shipping, and labor. 

Nearly all expenses of any business increase in an inflationary setting, without exception. Labor, typically the largest expense of any business, increases not only with new hires but existing employees look for larger salary increases, bigger bonuses, and more benefits because their family expenses are increasing every day. Insurance costs, utilities, rent, office supplies, and almost every expense line increases, sometimes month-over-month.

So, what should a small business owner do to manage through inflation cycles? The primary key is paying attention to your business’ financial statements, both income statement and balance sheet. During these inflation cycles it takes more that just looking at the financials monthly, it takes analyzing the numbers trends on a comparative month-over-month basis and also year-over-year. As an example, look at what your business is paying for overall cost of goods sold, (in real dollars and as a percentage of revenues) last month vs. prior month and at the beginning of the year and for the same period last year. Do the same for all of the larger expense line items. Hopefully the business’ revenues are increasing at the same or similar levels. If not, your bottom line will undoubtedly be less.

The next question you are probably asking yourself is – “Well, what can I do about it?” There can be a number of actions that a business owner can do in these situations. Obviously, increase pricing of the business’ products and services (if your pricing hasn’t increased in a while, the increase may need to be made a little at a time over time – but controlled and managed). Look at every line item in the Cost of Goods Sold and make adjustments as needed without jeopardizing quality or supplies or risking employee burn-out. Next, look at every expense line item to determine areas where savings may be possible. Here are a few examples: put all of the business’ insurance out for bid, seek other merchant service providers to potentially lower processing fees, protest property taxes and try to get the taxes lowered, combine some employee duties with the intent of possibly lowering the business’ headcount, refinance business debt to possibly decrease the business’ interest expenses, cut back on rented office space that is not being utilized to reduce rental expenses, seek lower cost utility service providers.

If you need help or assistance managing through this inflation business cycle, talk to a business advisor who has knowledge and experience in this area. We encourage you to visit our Web-site at www.silverfox.org and learn more about the Silver Fox Advisors, and how they can assist you with your business needs, as well as to discover more about our great programs and community outreach endeavors. 

Have You Thought About Selling Your Business Lately?

Rich Hall
Silver Fox Advisor
July 2024

You should…think about it, that is.

It’s estimated that 80% of a business owner’s wealth is in the business. That’s a lot to risk without a plan.

According to Exit Planning Institute:

• 50% of business exits are involuntary caused by events like death, disability, disagreement, divorce, and distress.

• 70% of businesses that are marketed to sell do not sell.

• 80% of businesses that transition to the 2nd generation fail.

Why?

Most business owners do not have a plan to exit their business. They go to market with the business “as is” and learn that what they feel it’s worth may not be close to what a buyer is willing to pay.

Here’s an example:

A business generates $7.5M in revenue and provides a net income of $1M. The owner put it up for sale and had interested buyers. After performing their due diligence, they all walked away. It came down to these factors:

• The business relied too heavily on the owner.

• A high % of the revenue came from a single customer.

• Top salesperson was retiring.

• The owner wanted more than it was worth.

• The business had many discrepancies in the financials.

What could’ve been done in hindsight?

Maximize Value with Exit Planning.

The first phase is to determine your personal goals, the finances required to fulfill them, and your goals for the business. This is followed by an assessment of the business’s attractiveness to the outside market and how ready you and the business are to transition to another owner. Finally, there’s a valuation of the business to determine a range in which it would sell for today.

The assessments help determine where in that range the business would likely sell. If the value exceeds your financial goals, you can proceed toward a transition. If not, you know the areas to work toward to improve the value.

What are some common things that increase value?

• Reducing the dependence on the owner(s).

• Improve leadership capabilities of management.

• Clean up the business’ financials.

• Document systems and processes.

• Diversify customer base and revenue.

• Identify areas of high risk and address.

The typical timeline to prepare for and exit the business is around 3 years. Expect at least one year for the business to sell and two years for the assessment phase followed by the value enhancement initiatives.

What’s the primary takeaway?

Learn what drives value for your business and develop a plan to become a value-based business versus solely focusing on income. In doing so, you’ll fulfill your goals for yourself, your family, and your legacy.

Rich Hall

Certified Exit Planning Advisor | Business Advisor

www.richhallgroup.com