The simple fact is that most of us want to control our own fate. This fact is especially true for entrepreneurs and business owners. However, the truth of the matter is that for most business owners, their fate isn’t completely in their own hands. For example, a variety of forces can prevent businesses from establishing their own prices.
Knowing whether or not your company has pricing power is essential and can influence a range of decisions that you may make. Let’s take a closer look at what steps you can take to control your own pricing.
What is Pricing Power?
This economic term describes the effect of a change in a product price on the demanded quantity of said product. Your company’s pricing power is linked to the demand for your products or services. If you have a high level of pricing power, you can raise your prices over time and maintain your customers.
Who Has the Greatest Pricing Power?
It is no great secret that the Amazons, Apples, Wal-Marts and auto manufacturers of the world exercise a tremendous amount of power. Part of this considerable, and seemingly ever growing, power resides in the fact that the size of these companies now rivals and even surpasses many nation states. This grand level of power is unique in human history in many ways. Along with it comes the ability to exercise an almost god-like authority over suppliers.
Today, these ultra-powerful companies commonly dictate to vendors what prices they are willing to pay, and the quasi-monopolistic nature of these companies often leaves vendors with no choice to comply. In short, these 900-pound gorillas are telling companies both large and small exactly how much they will pay for a given number of bananas.
Step 1 – Providing a Branded Product or Service
If you discover that your company doesn’t have pricing power, there are steps you can take. One step is to produce a branded product or service. In this way, you are able to offer something of greater value than your competitors. Through having a branded product or service, it is possible to create a higher perceived value in the minds of not just the Amazons of the world, but in the minds of consumers as well.
Step 2 – Innovating
Another path towards achieving pricing power is through innovation. A great example of leading the way in innovation is Apple. While few companies have Apple’s almost ethereal resources, that is not to say that you cannot find ways to innovate within your own sphere or industry. Small innovations can often have an outsized impact and help a business stand out from a crowded playing field. Innovation that leads to patent production is an excellent way to gain a degree of pricing power.
Step 3 – Offering Exceptional Service
A third option for achieving a degree of pricing power is to provide what could be called “mind-blowing” service. By providing service that is truly a cut above what the competitors can match, your company is positioned to achieve pricing power. Providing your customers with something they simply can’t get elsewhere is a key way to setting a price that is more in line with what you desire.
There are many marketplace variables that your business can’t control. The trick is to evaluate your business, your business’s potential and the concrete and practical steps you can take starting today to achieve pricing power.
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John Warrilow is the founder of The Value Builder System and accomplished author. While not a business broker himself, Warrilow has gathered considerable knowledge and expertise on the industry. His previous book Built to Sell was listed as one of the best business books of 2011. In this article, we will explore some of the key points in Warrilow’s latest book, which is entitled The Art of Selling Your Business: Winning Strategies and Secret Hacks for Exiting on Top. This book was released on January 12th, 2021 and is proving to be invaluable for business owners.
Selling When the Time is Right
One key focal point of the book is that business owners should skip trying to find the perfect “magical time” to sell their business. Additionally, Warrilow notes, “I make the strong recommendation in the book that the best time to sell your company is not during some mysterious macroeconomic environment. It is when someone is willing to buy it and you get an offer. And that is because at that point, you’re in the position of strength.”
The DIY Approach
This book reinforces the fact that business owners truly need to work with an intermediary if they are to achieve optimal results. Warrilow even includes his six reasons for why every business owner should hire a business broker or M&A advisor.
Many business owners think that they can simply handle selling their business on their own. But the simple fact is that business owners usually have no experience in selling a business. Add this to the fact that selling their business is likely to be the most important financial decision the business owner ever makes, and it quickly becomes clear that business owners are doing themselves a considerable disservice when they opt to handle everything on their own.
A Business Broker vs. a Lawyer
As Warrilow points out, oftentimes business owners think that rather than working with a business broker or M&A advisor, they can turn to a trusted lawyer who has served them in the past. But this thinking is flawed when it comes to successfully selling a business. As Warrilow states, “a lawyer, almost by default, is going to be very conservative as everything exposes a lawyer to risk. And that is why using a traditional attorney is almost always a mistake.”
If you are planning to sell your business now or in the future, a book like Warrilow’s The Art of Selling Your Business: Winning Strategies and Secret Hacks for Exiting on Top can serve as a uniquely valuable tool in your toolbox.
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No two companies are quite alike, and this also means that there are many reasons why companies can fall into trouble. While the number of variables involved in operating a company are practically endless, there are a handful of reasons why companies can fall on hard times. Let’s take a closer look.
Companies that lack focus can often run into considerable trouble. Not understanding their customers and what they need or want can lead to endless problems. It is vital that companies frequently stop and assess who their customers are and whether or not they are properly servicing their needs.
Not too surprisingly, many companies can run into trouble because of poor management. Management problems are not one-dimensional, but instead take a variety of shapes. Management that isn’t focused, is incompetent, or simply doesn’t care about the business can translate into a business’s premature death.
Under the umbrella of “management problems” also falls such missteps as poor financial controls, quality control problems, operational issues, and/or not keeping up with technological advancements. At the end of the day, many of the problems on our list have at least some management issue missteps at their heart.
Loss of Key Employees or Clients
The loss of a key employee or a key client can spell serious trouble. Of course, no management team can predict every eventuality. However, when there is a loss of a key employee or client, and there is no plan for replacement, then management does shoulder at least some of the blame. The savviest companies take steps to ensure that there are ways to replace the most important employees and clients.
Failure to Compete
More than one business has been buried by the competition or failure to see a new wave of competition coming. For example, countless mom and pop video rental stores were absolutely bludgeoned by the introduction of Blockbuster Video a generation ago.
While it is true that sometimes market forces are so aligned against a business that survival is almost impossible, that is normally not the case for most businesses on a year-to-year basis. The most effective and competent management can see the competition out on the horizon. Or at bare minimum, they have an emergency plan in the event that the competition becomes more intense.
All too often by the time a business realizes that it is in trouble, it is already too late. If the problems can’t be fixed, then it may be time to consider selling the business. But such decisions must be made quickly in order to prevent additional bloodletting.
Optimally, a business is sold while it is doing well. Regardless of whether a business is thriving or experiencing difficulties, a business broker or M&A advisor can be an invaluable ally in helping a business reach its full potential.
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Your time is your most valuable commodity. The simple fact of the matter is that many “buyers” are not truly buyers. In contrast, they are often window shopping or acting out a fantasy of buying a business. In other cases, they would only plan to buy if they were to find the “deal of the century.” The last thing you want to do is waste your time trying to work out deals with people who aren’t serious or qualified buyers.
The Plus and Minus System
The best way to find a serious buyer is to use a “plus and minus” system. This system will help you weed out the window-shoppers from buyers that are truly worth your time.
First, let’s evaluate factors for which you’ll want to deduct points. If a buyer needed outside financing, then subtract 4 points. Likewise, if a buyer has been looking for 6 months or more, you’ll want to also subtract 4 points. If a buyer has no cash available, you should subtract 3 points. Additionally, if a buyer is currently working in the corporate world, you should also subtract 3 points. These are the 4 largest reasons to subtract points, but they are not the only reasons.
Below are a few reasons to subtract 2 or 1 points from a buyer’s rating.
- You learn the spouse is not supportive – Subtract 2
- Prospective buyer uses a legal pad or clipboard and takes copious notes – Subtract 2
- The buyer indicates that they are in “no rush” and want to find the perfect business – Subtract 2
- The buyer is under the age of 25 or over the age of 62 – Subtract 1
- The buyer is currently renting even though he or she has lived in the area for some time – Subtract 1
Factors to Add Points In
There are also many factors that would make a buyer fall onto the “plus” side. If the prospective buyer does not currently have a job or has just resigned from their job, then add 3 points. Likewise, if a prospective buyer acknowledges that books and records are not the only metrics by which to judge a business, add 3 points.
Add 2 points if a buyer has enough money to buy the business and another 2 points if the buyer currently has no dependents. If a close relative or family member currently owns or has owned a business in the past, then add 2 points. If the buyer is between the ages of 25 and 62 add 1 point. If he or she is a skilled worker or professional, add 1 point. Finally, if the buyer does not consider location to be a prime consideration, add 1 point.
This streamline, straightforward and relatively simple system does work. Use this system consistently, and you will quickly eliminate a large percentage of window shoppers. While no system is perfect, this “plus-minus” system for accessing prospective buyers will save you countless hours and many potential headaches.
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Mass Mutual Life Insurance produced an ownership transition survey back about a decade ago. The survey results were based on feedback and answers from family-owned businesses. It produced some very interesting results, and is worth examining even today. While the survey at this point is quite outdated in terms of the timeline, there are still many valuable nuggets of information to be gleaned from it. Let’s dive in and take a closer look at the numbers and what they can tell us for 2021 and beyond.
While the Mass Mutual Life Insurance ownership transition survey had a range of important points, the one that leaps right off the page is the fact that a whopping 80% of family-owned businesses are still being controlled by their founders. A large percentage of those founders are Baby Boomers who will have little choice but to retire in the next few years.
The survey indicated that 55% of CEOs over the age of 61 or older have yet to choose a successor. This fact serves to emphasize the fact that a “retirement wave” will hit family-owned businesses, and this will lead to some interesting shifts and opportunities. And while the survey indicated that 13% of CEOs state they will never retire, the reality of the situation is that ownership will eventually change hands. Business brokers can expect to see an unprecedented wave of interest in their services. Additionally, prospective buyers will also have a highly unique opportunity to buy established businesses.
The survey also indicated that 30% of family-owned businesses will be changing leadership within the next five years. Of course, with that change of leadership, many possibilities open up, including the possibility of selling. However, it is important to note that while there will be a “retirement wave” amongst the Baby Boomers, not all businesses currently owned by Baby Boomers will be placed on the market.
The survey noted that 90% of businesses currently plan on remaining family-owned, and 85% of businesses plan on having their next CEO be a family member. However, it is important to keep in mind that even if these numbers were to hold true, that means at least 10% of businesses will be up for sale.
It is likely that this number is far higher now than when the survey was conducted due to the aging nature of the Baby Boomer population and owners looking to sell because of pandemic related issues. Simply stated, there will be no shortage of businesses for sale in 2021 and beyond.
Another important aspect of the survey to consider is the fact that family-owned businesses are not prepared to sell. According to the survey, 20% of family-owned businesses have not completed any form of estate planning, and 55% of family owners do not have any formal company valuation for estate tax estimates. Combine these statistics with the fact that 60% of businesses do have a written strategic plan, and it becomes clear that family-owned businesses, especially those considering selling in the future, are most definitely in need of professional assistance. Many family-owned businesses are ill prepared for the future and have a range of vulnerabilities. Business brokers and M&A advisors are uniquely positioned to provide those services.
You shouldn’t expect to sell your company overnight. For every company that sells quickly, there are a hundred that take many months or even years to sell. Having the correct mindset and understanding of what you must do ahead of time to prepare for the sale of your company will help you avoid a range of headaches and dramatically increase your overall chances of success.
First, and arguably most importantly, you must have the right frame of mind. Flexibility is a key attribute for any business owner looking to sell his or her business. There are many variables involved in selling a business, and that means much can go wrong. An inflexible owner can even irritate prospective buyers and inadvertently sabotage what could have otherwise been a workable deal.
Be Flexible on Price
A key part of being flexible is to be ready and willing to accept a lower price. There are many reasons why business owners may fail to achieve the price they want for their business. These factors range from lack of management depth and lack of geographical distribution to an overreliance on a handful of customers or key clients. Of course, one way to address this problem is to work with a business broker or M&A advisor in advance, so that such price issues are minimized or eliminated altogether.
Be Prepared to Compromise
In the process of selling your business, you may want to achieve confidentiality and sell your business quickly and for the price you want. However, the fact is that most sellers find that it is possible to have confidentiality, speed, and the price you want, but not all three. Ultimately, you’ll have to pick two of the three variables that are most important to you.
A third way in which business owner flexibility can boost the chances of success is to embrace the virtue of patience. By accepting the fact that businesses can “sit on the shelf” for a considerable period of time, you are shifting your expectations. This realization can help reduce your stress level. The fact is that stressed out owners are far more likely to make mistakes.
Sometimes Losing is Really Winning
A fourth way in which business owners should be flexible is realizing that you and your lawyer will not win every single fight. There will be many points of contention, and a smart dealmaker realizes that it is often better to have a good deal than a perfect deal. You may have to make sacrifices in order to sell your company. Simply stated, you shouldn’t expect the other side to lose every point.
At the end of the day, a savvy business owner is one that never loses sight of the final goal. Your goal is to sell your business. Seeing the situation from the buyer’s perspective will help you make better decisions on how you present your business and interact with prospective buyers. Maintaining a flexible attitude with prospective buyers helps to position you as a reasonable person who wants to make a deal. Goodwill can go a long way when obstacles do arise.
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When it comes to buying or selling a business, there is no replacement for a solid confidentiality agreement. One of the key ways that business brokers and M&A advisors are able to help buyers and sellers alike is through their extensive knowledge of confidentiality agreements and how best to implement them. In this article, we will provide you with an overview of what you should expect out of your confidentiality agreements.
A confidentiality agreement is a legal agreement that essentially forbids both buyers and sellers, as well as related parties such as agents, from disclosing information regarding the transition. It is a best practice to have a confidentiality agreement in place before discussing the business in any way and especially before divulging key information on the operation of the business or trade secrets.
While a confidentiality agreement can be used to keep the fact that a business is for sale private, that is only a small aspect of what modern confidentiality agreements generally seek to accomplish. Confidentiality agreements are used to ensure that a prospective buyer doesn’t use any proprietary data, knowledge or trade secrets to benefit themselves or other parties.
When creating a confidentiality agreement, it is important to keep several variables in mind, such as what information will be excluded and what information will be disclosed, the term of the confidentiality agreement, the remedy for breach, and the manner in which confidential information will be used and handled.
Any effective confidentiality agreement will contain a variety of key points. Sellers will want their confidentiality agreement to cover a fairly wide array of territory. For example, the confidentiality agreement will state that the potential buyer will not attempt to hire away employees. In general, this and many other details, will have a termination date.
The specifics of how confidentiality is to be maintained should also be included in the confidentiality agreement. Parties should agree to hold conversations in private; this point has become increasingly important due to the use of mobile phones and in particular the use of mobile phones in out-of-office locations. Additionally, it is prudent to specify that principal names should not be used in outside discussions and that a code name should be developed for the name of the proposed merger or acquisition.
Safeguarding documents is another area that should receive considerable attention. Digital files should be password protected. All paperwork should be kept in a safe location and locked away for maximum privacy when not in use.
In their enthusiasm to find a buyer for their business, many sellers have overlooked the confidentiality agreement stage of the process. Most have regretted doing so. A confidentiality agreement can help protect your business’s key information from being exploited during the sales process. Any experienced and capable business broker or M&A advisor will strongly recommend that buyers and sellers always depend on confidentiality agreements to establish information disclosure perimeters.
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The simple fact is that selling your business is likely to be the single most important financial decision you’ll ever make. With this important fact in mind, it is essential that you prepare far in advance. Let’s dive in and take a look at some of the key items you’ll want to check off your list before placing your business on the market.
Think About Legalities
When it comes to selling a business, legal issues should be at the forefront of your thoughts; after all, selling your business does involve the creation and execution of a complex and detailed legal agreement. There are many times in life where it is possible to cut corners, but hiring a good lawyer or law firm is not one of those times. Moreover, you’ll want to settle all litigation, environmental issues or other issues that could potentially derail a sale.
Deal with Serious Buyers
Working with a good business broker or M&A advisor is an essential part of the selling process, as these professionals will help you to weed out “window shoppers” as well as prospective buyers who are simply not a good fit for your business. Any serious buyer should be willing to submit a Letter of Intent. Everyone should be on the same page as far as price and terms as well as what assets and liabilities are to be assumed. This second point reinforces the first point. It is essential to have an experienced lawyer helping you through various aspects of the sales process.
Be Flexible on Price
You should also be prepared to accept a lower price than you might ideally want. There are many reasons that this may occur, ranging from a lack of management depth and a lack of geographical distribution to a dependence on a limited number of clients. Reliance on a small number of customers and/or clients can give potential buyers pause, as it could raise concerns regarding the stability of your business. Addressing these issues years before placing your business on the market can help you best achieve the price point you desire. This is yet another reason to work with a business broker in advance.
Improving Your Chances for Success
In terms of achieving the price that you want for your business, there are other steps you can take. Increasing the visibility and profile of your business is always a savvy move. Consider attending trade shows, boost your online profile via stepping up your social media game and explore creating a coherent public relations program.
Finally, selling a business is often a waiting game. You have to be psychologically prepared to wait a considerable period of time before your business is sold. The fact is that most businesses do indeed sit on the shelf for a considerable period of time before they are sold.
Preparation, patience and good organization will dramatically increase your chances of selling your business and achieving an appropriate price. The sooner you begin organizing your business and working with experienced professionals, the greater the chances of success will be.
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Most business buyers and sellers are wondering what 2021 and beyond will bring. BizBuySell and BizQuest President Bob House provided a range of insights stemming from BizBuySell’s 3rd Quarter Insight Report and a survey of over 2,300 business owners.
The simple fact is that the pandemic has most definitely had a major impact on the buying and selling of businesses. This fact is obvious. But diving deeper, there are a range of insights that can be gleaned.
First, owners do understand that COVID is a massive force in business right now. According to the survey, 68% of owners feel that they would have received a better price for their business in 2019 than in 2020. Only 37% of respondents felt that they would receive a better price this year. Of owners who felt that they would receive a lower price in 2020 than in 2019, 71% of these owners said that their assessment was directly tied to the pandemic and its accompanying economic impact.
A question on the survey asked owners if the pandemic had impacted their exit plans. 55% responded that the pandemic had not changed their exit plans. Additionally, 22% said that they now planned on exiting later, and 12% stated that they planned on exiting earlier. In short, the majority of business owners were not changing their exit plans.
On the other side of the coin, buyers are acknowledging that the present seems to be a very good time to buy. A staggering 81% of buyers stated that they felt confident that they would be able to find an acceptable price point. In terms of their purchasing timeline, 72% of respondents stated that they were planning on buying a business soon. Survey follow-ups indicated that large numbers of buyers were also planning on buying in 2021.
Generational differences are playing a role as well. Baby Boomers tend to be more optimistic than non-boomers as far as their overall views on the recovery. 43% of Baby Boomers now expect the economy to recover within the next year as compared to just 30% of non-Boomers. House pointed out, “Baby Boomers are the generation that did not plan, which makes it harder for them to adjust transition plans if they were preparing to retire, as small businesses don’t have the infrastructure and management teams in place to wait out a bad cycle.”
Based on the information collected by BizBuySell’s 3rd Quarter Insight Report and their survey, it is clear that there is a new wave of buyers on the horizon. The report supports the notion that the pandemic has made small business ownership an attractive option for new entrepreneurs. Factors driving new entrepreneurs into the marketplace include everything from being unemployed and wanting more control over their own futures to a desire to capitalize on opportunities.
Finally, House notes that 2021 could be a “perfect storm for business sales,” as 10,000 Americans will turn 65 each and every day. This means that the supply of excellent businesses entering the marketplace will likely increase dramatically.
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Goodwill is a term that might cause a little confusion for some. But at its heart, it is a relatively straight-forward concept. Goodwill is generally viewed as a term that encapsulates everything from a business’s reputation to the goods, services and products it provides. The key idea is that there is goodwill if the business is viewed as a true and functioning business that has longevity in the marketplace.
The Importance of Reputation
It is important to point out that many of the aspects that go into defining goodwill are not easily noted on a balance sheet. One of those elements has already been mentioned in the form of reputation. A good reputation is an intangible asset that is hard to put an exact dollar amount on. Imagine that you had a choice between two businesses that were almost identical. However, one business enjoyed a strong reputation while the other had a reputation for poor customer service and goods and services. This decision would be an easy one for most prospective buyers.
Going Beyond the Numbers
When a buyer pays more than the recognized value of a business, goodwill usually plays a major role. There are many variables that can be included into goodwill such as quality and track record of management; strength of the local economy; the loyalty of the customer base; good relationships with suppliers; copyrights; trademarks and patents; name or brand recognition; specialized training and knowhow. The list goes on. Business brokers and M&A advisors will be sure to highlight these goodwill factors to prospective buyers. Factors that impact the longevity of a business, and its long-term potential, should not be overlooked.
The Evolving Meaning of Goodwill
In recent years, the accounting profession has changed how it deals with the concept of goodwill and how it is factored into decisions. Since the rise of the Industrial Revolution, many large companies were built around the ownership and use of heavy equipment and machinery; however, in the last two decades there has been a shift away from tangible assets and towards intangible assets.
Assets under the umbrella of intellectual property, including patents, trademarks, brand names and more, are now considered key aspects of goodwill. In short, in the last twenty-years, goodwill has taken on a more complex and varied meaning. Today, businesses are not necessarily based around massive factors and huge assembly lines. Workers and management in the world’s largest companies 50 years ago would be hard pressed to explain the inner workings of some of today’s corporate juggernauts.
Goodwill is more complicated than ever before. This factor serves to underscore the value, and importance, of working with an experienced, capable and proven business broker or M&A advisors. The goodwill elements within a business need to be highlighted so that prospective buyers fully understand the business’ real value.
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