When a company has loyal, long-standing customers, the idea of raising prices every year can be unappealing. Many small business owners avoid raising prices for fear of hurting relationships, but that also means inflation is eroding profitability every year.

Here’s what to tell your customers:

Eventually, some of your work will simply be projects that break even. I once sold a printing company whose owner had served several customers for decades. He had business relationships that he also considered friendships. He hadn’t raised rates for these customers in years because he didn’t want to have difficult conversations and possibly lose their business.

When the new owner took over, he realized that these same long-term customers were draining profitability. He raised prices comparable with the market and was prepared to deal with the fallout. The conclusion was that he was earning the same Seller’s Discretionary Earnings (SDE) as the previous owner while serving fewer, more profitable customers—with far fewer headaches and customer relationships to manage.

Your company may be easier and less stressful to run with higher-quality customers. Some business owners don’t track expenses year-over-year. They’re focused on revenue, so they simply sign off on invoices that keep getting larger as costs rise.It’s worth the time to examine how materials, labor, and infrastructure costs have increased over the past twelve months. Then you’ll be able to make an informed decision about whether to – and how much to – raise your prices.

You may lose a few cost-sensitive customers, but you can work to replace them with customers who can afford your rates. Eventually, the increase in profitability will pay off; you may need fewer resources to complete the work, and higher margins will almost certainly reduce your stress as an owner.

Buyers will be focused on your profitability rather than your gross revenue. Revenue is an indicator of the size of your company, but it doesn’t tell the complete story. Savvy buyers, as in the example of the printing company, will be looking at EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or Seller Discretionary Earnings (SDE), which is how you measure cash flow. They’ll also be looking for low-hanging fruit that will increase profitability and cash flow in the first few months after they take over operations.

Offers and their multiples will be based on EBITDA or SDE and profitability, so your focus should remain there as well. That’s why I recommend that owners in a 2-3-year sales window consult with an experienced broker. A broker can help you understand your company’s value in the current market and will often offer advice on how to cut costs, streamline operations, and increase your bottom line.

Once you start conducting annual evaluations of your expenses and profitability, you’ll be able to clearly communicate to your customers why rate increases are necessary. Raising rates gradually – say between 3 percent and 5 percent annually – normalizes price adjustments for customers and allows you to invest in better service or product improvements. You’ll also have an accurate and data-based way of evaluating new business that comes your way.

About The Author:

Bianca Evans is a Certified Business Broker and Owner of My Florida Business Broker in Jacksonville. She has facilitated more than 200 business transactions since 2006 and holds multiple professional designations, including Certified Business Intermediary (CBI), Certified M&A Professional (CM&AP), and Board-Certified Intermediary (BCI). Bianca helps business owners understand their company's value, improve profitability, prepare for sale, and navigate successful business transitions.