Hold the line on
prices, even if new

DEAR INFORMER: If you’re new in business, should you charge less than others who have been in business longer? I don’t think length of business should factor in, but my customers seem to be looking for a discount.

DEAR NEW:Of course they’re looking for a discount, but that’s not really because you’re new in business. That’s just the reason customers can seize upon in your particular case.

If you weren’t new, they’d find another reason to cheap you out.  Your business is old, and the young upstarts are charging less than you. Your business is medium, and everyone knows those in the middle should have prices in the middle.

Then there’s the Informer’s personal favorite: You will gain just as much in intangibles as the customer in this “win-win alliance,” hence you should cut your prices. (Try to meet payroll with intangibles.)

The point: It’s the customer’s job to ask for discounts. It’s your job to set your prices high enough so your new business can someday become old. For that, you need a pricing strategy.

Regina Barr, president of Red Ladder Inc. in St. Paul, gives a workshop on setting prices. “I don’t think it has anything to do with time in business, and it has everything to do with what you deliver for clients,” Barr says.

“The number of years can play into it with some clients, but you want to position it as, here’s your experience and what you offer.”

She suggests at the beginning an exercise in which you budget how much you want to make, how much vacation you want, what your fixed costs are, how much time you want to spend on administrative functions, and similar matters. Make sure the math works out so you have a viable business.

Check the market, too. “Do due diligence and check what other people are charging, but be cautious there. If you are a consultant, take into account what is the unique value that you bring, and price accordingly.” Barr says.

A lot of people “start to cut prices all over the place and then they start struggling,” Barr adds. Rather than discounting, she recommends pricing services separately, with different parts carrying different price tags. Then, if a customer can’t afford the whole package you can eliminate services. For example, she might offer to do five focus groups for a certain price, but cut to three for less.

“Most customers realize that everyone has to make a profit. You need to make better than a livable wage,” Barr says. Basing prices on a foundation of philosophy, research and practicalities helps. “If you have a structure in place, you don’t have to apologize for your fees.”

Regina Barr, Red Ladder Inc.: 651.453.1007; regina.barr@redladder.com;www.redladder.com

PERSONAL FINANCE

DEAR INFORMER: How can you diversify assets for retirement when you own a small business? Like many owners I know, everything I have goes into my company, and that seems risky.

DEAR SAVINGS: “It’s really tough” to put assets in something other than the business, concedes Nicole Middendorf, president of Strategic Financial Inc. in Plymouth. She has to remind herself, a financial planner who helps people invest, along with her clients that diversification is a must.

When the Informer reached her by phone, Middendorf says she was just thinking about buying more real estate properties. But then she thought about options: Should she invest in more stocks instead, or perhaps put the money into marketing of the book she’s writing?

“Most business owners have a good sense of how the business is doing,” Middendorf says, and will be able to decide where they’ll get the best return on that investment. “But you always want to take advantage of the opportunities.”

She advises people to put money in different areas: a different industry from your business, for example, or a segment that has an economic cycle different from your other investments. If one area is down, perhaps another will be up, is the idea.

The Informer knows real estate brokers who invest in early-stage med-tech companies, for example, and financial planners who invest in real estate. She also knows at least one business owner who says he puts money in his retirement plan every month first, always the same percentage.

Middendorf says she sees too often owners who can’t sell their company after 30 years at work. That’s why she insists on retirement plans for the owners and for employees. The latter will help to attract and retain staff, too.

After three to five years in business, many owners are advised by their tax planners to open a SEP plan. “You can take 25 percent of the net from the business, and that’s a deduction right there,” she says.

Another common occurrence: after a few years entrepreneurs will get a new business idea, and start investing money in a new company, thus effectively diversifying their assets.

“It’s risky” to tie up all your money in your company, Middendorf says, but she also understands.

“When I wasn’t a business owner myself, I had a completely different perspective. When I was financial adviser at a corporation I thought, why wouldn’t someone take that money and put it in the stock market for retirement? Now that I’m a business owner I think, why wouldn’t I put that money into marketing or a new staff member? Why wouldn’t I put my money in my book?”

Accepting that tendency, but deliberately adding diversity to your holdings, helps take some risk out of the risky proposition of owning a business.

Nicole Middendorf, Strategic Financial Inc.: 763.208.0482; nicole.middendorf@lpl.com; www.helpingyouinvest.com

BUYING A BUSINESS

DEAR INFORMER: I’m a former general manager of a large company who wants to be a chief operating officer for a small-business owner, with the idea that one day I’ll buy the business. How can I find an owner to bring me on?

DEAR FORMER CORPORATE: There is one sure way to endear yourself to a small-business owner: Offer cold hard cash to purchase a minority share in the business. Without that, it can be difficult to make the transition from corporate Minnesota to small-business officer.

Crass, but true. Owners will look first to people they know, usually hard-working employees who have been with them from the beginning, if not family members who want to be groomed for ownership one day. They’ll look to outsiders only if they bring equity to the table — along with many years of expertise in the same industry.

Tom Lyons is a business broker who’s seen dozens of displaced corporate executives who want to get into a small business. He is president of Faelon in St. Louis Park. He advises them to consider carefully how much money it will take to buy a business.

“Do they have enough money?” he always asks. “Whatever money you have, divide it in three parts: one-third down payment, one-third operating dollars, and one-third what I call dry powder, or reserves” for unexpected expenses. If the total is “a couple of hundred thousand dollars,” the best option might be a franchise, with a defined and relatively lower price tag.

For this questioner, he would recommend an extensive search in her area of expertise.

“A lot of times buyers say, ‘I want anything but what I had before.’ I say, why turn your back on all that experience?

“We go by industry experience, size of company, and geographic territory, and we contact every firm with a fit,” Lyons says. “Occasionally we’ll find someone who would sell a minority interest, because the owner has way too much to do.”

He also recommends taking some aptitude tests and defining your skills before searching. “Understand what you’re good at, and then balance yourself off with other skills,” Lyons says. “Are you great in sales? In administration? There’s a lot of tools that can help” people find their strengths.

Tom Lyons, Faelon: 952.591.1998, ext. 1; lyons@faelon.com; www.faelon.com