Inflation has dramatically increased costs over the past few years, and almost every business is feeling the pinch. Although inflation has been slowing down recently, the cost of labor, supplies, insurance, utilities, and other services has all increased, making profit margins slimmer for every business owner. If you’re thinking about selling your franchise over the next couple of years (and even if you’re not), you should consider an in-depth analysis of your costs and raising prices for your customers.

Shippers and the USPS (over which you have no control) have already raised prices, and consumers are grumpy. But they also understand that the cost of everything is going up, so they will not attribute price increases to simple greed.

Many owners are reluctant to increase prices, worried that their customers will take their business to a competitor who has kept things the same. But in our experience, most franchise customers patronize the businesses they do mostly for convenience and proximity to their home and business, so you won’t lose many sales.

It’s important to remember that Seller’s Discretionary Earnings (SDE) is the bottom line of your business, both as an owner and as a seller. Even if your revenue has remained steady (or increased) over the past year, if your profitability has gone down, you are losing value in your company. SDE is the most important factor in a buyer’s decision process, and it’s what multiples in offers are based on.

Buyers may also be reluctant to buy a company in need of a major price overhaul. They’d rather purchase a company whose leadership has done the hard work for them, so that’s one less thing they must tackle as a new owner.

One way to help alleviate rising costs is to ensure that your operation is running as efficiently as possible. Eliminate waste from your processes and products. Make sure your employees are as conscientious about saving money for the business as they are about making it.

The next step in the process is to document your cost increases in one place so you can see the total effect. Many owners don’t realize how much their costs have gone up year over year because they don’t have a formal budget and pay bills separately as they come in. Once all the increases over the past year are in a single spreadsheet, you can see how much more it costs today to perform a service or deliver a product than it did a year ago.

Now, you’ll have the information you need to decide how much your prices need to go up. One thing every business consultant will advise is to understand your costs thoroughly so you only have to make this painful move once a year or so. (The cost analysis should become a yearly exercise.) SCORE (The Service Corps of Retired Executives) has a great guide for small businesses that want to raise prices without losing customers.

They recommend that you be transparent with your staff so they understand the basis for the change in pricing. You may also need to help them with scripting so they deliver a neutral and professional response to customers who may ask about the increases.

SCORE also says there’s no need to over-explain to customers. If you have a rate sheet, you can make sure the new version is available to everyone who comes in. A simple sign with the new rates (and their effective date) will be enough information for most customers.

Every dollar you add to your bottom line will pay off when you put your company on the market. It’s been a rough few years for owners who are operating a business, but there will always be buyers for well-run companies that are managing their expenses and investing in what matters.

If we can help you analyze your costs and their effect on your business's value, please request a complimentary opinion of value.