How to Determine an Asking Price for Your Business
Determining an asking price when selling your business is a blend of art and science. Setting a price involves a delicate balance as you evaluate the true worth of your company. If you price it too high, you may not 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 and sale prices continually fluctuate. When thinking about how to price a business for sale, you'll need to consider a buyer’s assessment of financial statements, asset values, industry comparable sale figures, return on investment, and the goodwill value of your business.
Many sellers prefer to rely on the expertise of a business broker or professional appraiser. If you want to prepare ahead of time or choose to go it alone, there are several steps you can take to get an estimate.
Get Your Financial Statements in Order
To assess the income-based value of your business, you’ll need to gather formal financial statements for the current year, as well as the previous three years. Consult with your accountant or bookkeeper and assemble the following documents:
- Income/Profit & Loss 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 the full financial benefit a business generates by using the company's net profit and then adding back certain bottom-line expenses. Owner-operated businesses use an SDE to measure the full financial benefit a business generates. Work with your accountant or bookkeeper to recast, or add back expenses, 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 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 valuation while considering their acquisition cost, age, and condition. The liquidation value of your business is the sum of all these values put together. However, for most businesses, this will fall short of the actual value, as this approach does not consider cash flow, intangibles, and other factors. Liquidating these assets before the sale may be a quicker and more cost-effective way to recover value and exit your business if the worth of these assets is close to an appropriate asking price of your business.
Estimate the Value Using an Earnings Multiple
Pricing multiples are ratios of business sale prices to key financial metrics - typically earnings and revenue. These multiples vary by many factors, including industry, geography, and individual business characteristics. Typical earnings multiples range from one to four times the annual owner cash flow/discretionary earnings. 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.
(To learn more, see Using Pricing Multiples to Value a Business for Sale.)
Research Comparable Businesses
After arriving at an estimated sale price, it’s time to do comparable research. Review listings of businesses for sale in your business category, market area, and price range. Prospective buyers can use BizBuySell’s valuation report which enables you to query a database of past small business sales and show businesses comparable to yours.
Pinning down an effective selling price can be rather complex. Most experts agree that an income-based valuation, which analyzes key trends of several years of financial statements, is best when considering how to price a business for sale. More importantly, buyers will almost certainly base their own purchasing decisions on relative earnings of potential business acquisitions.
Business owners are wise to seek assistance from a business broker or professional appraiser to help get at an unbiased, realistic asking price.