How to Determine an Asking Price for Your Business
Determining an asking price for your business can be tricky. If you price it too high, you won’t attract any interest. If you price it too low, you risk leaving money on the table. The business-for-sale marketplace is a dynamic exchange in which both asking prices and sale prices continually fluctuate. What your business is likely to sell for is based on a buyer’s assessment of financial statements, industry comparable sale figures, asset values, return on investment, and the goodwill worth of your business as a going concern.
Many sellers prefer to rely on the expertise of a business broker or professional appraiser. Yet, if you want to prepare ahead of time, there are several steps you can take on your own to get a ballpark estimate:
- Estimate the value of your tangible assets. Start by making a list of all your business’s physical assets, including furnishings, fixtures, equipment and inventory. Estimate a realistic value while considering their acquisition cost, age and condition. The liquidation value of your business is the summation of all these values put together. However, for most business, this will fall short of the actual value, as this approach does not take into consideration cash flow, intangibles, and other factors. If the worth of these assets is close to an appropriate asking price of your business, then liquidating these assets before the sale may be a quicker and more cost-effective way to recover value and exit your business.
Get your financial statements in order. In order to estimate an income-based value of your business, you’ll need to assemble formal financial documents for the current year, as well as the previous three years. Consult with your accountant or bookkeeper and assemble the following documents:
- Income statement showing gross revenue, expenses and bottom line profits (or losses)
- Cash flow statement showing how much money was received and paid out of your business and how business assets changed as a result
- Balance sheet showing the value of all tangible assets and liabilities
- Statement of seller’s discretionary earnings (SDE) showing how much your business makes after backing out non-recurring and discretionary expenses. Work with you accountant or bookkeeper to recast your business income statement into what’s interchangeably called a statement of owner’s cash flow or statement of seller’s discretionary earnings (SDE). This is the basis for sale pricing and of primary interest to buyers
- Estimate the value using an earnings multiple. Using revenue and cash flow, multiples are ratios of business value to key financial indicators, usually revenue and cash flow. Multiples vary by many factors, including business type and geography. Typically, business values range from one to four times the annual cash flow. Estimate your earnings multiplier by assessing your business in key areas affecting its future, such as revenue and profit trends, products, customer base, or position in its industry. Multiply your SDE by your earnings multiplier to arrive at an estimated sale price.
- Research comparable businesses. After arriving at an estimated sale price, do some researching. First, go to BizBuySell.com and check other listings of businesses for sale in your business category, market area and price range. Next, use BizBuySell’s valuation report, which enables you to query a database of past small business sales and show you businesses comparable to yours.
Arriving at an accurate selling price can be rather complex. And, most experts will agree that an income-based valuation, which analyzes key trends of several years of financial statements, is the best method for valuing a business. Business owners should seek assistance from a business broker or professional appraiser to use this method.
Yet, determine an estimated asking price for your business by assessing tangible assets, using earnings multiples, or researching comparable businesses can be very helpful. Not only will this give you a better sense of whether or not to sell your business, it will also give you a clearer picture of your business’s strengths, weaknesses and potential for growth.