Five Things that Determine the Selling Price of Your Business
Anyone who is planning to sell their business thinks of this one particular question: how worthy is my business?
When you put your business up for sale, there are many complicated issues to be considered, the biggest of which is determining the selling price. Selling a business can be a challenging procedure. For most people, they have not been through the business sales process before and are surprised to learn how different it is when compared to a typical real estate transaction.
The value of the business consists of not just the price (i.e. the amount to be paid for the business) but also the associated terms and the deal structure as well. Different values for a business can exist because of different operating assumptions, deal structures, and payment terms. Practicing these five things will help you determine the selling price of your business. So, without any further delay, let’s get started.
Get your financial statements in order :
The entire process of selling a business is usually much more evolved and can be complicated. First of all, when selling a business off you should have adequate knowledge about your business’s finances. This can be achieved by assembling formal financial records of your business for this year and the previous three years (if your business is that old). If you aren’t skilled in accounting methodologies, then you should hire an accountant or a bookkeeper who will help you prepare the following forms :
Income statement: showing your gross revenue, costs and how much your business made or lost each year.
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 owned by your business and the liabilities your business owes.
Seller’s discretionary earnings statement: also called the owner’s cash flow, showing how much your business makes after non-recurring and discretionary expenses.
Estimate the value of the tangible assets of your business :
Next, it’s important for you to list all the physical assets of your business including furniture, fixtures, equipment, and inventories. This is done for two reasons. Firstly, analyzing the complete worth of the tangible assets is crucial to business buyers because they can ask for a complete asset list including purchase prices and current market values. Secondly, if you determine the value of the assets of your business, it is very similar to the price you’re going to receive through a sale.
You may decide at this point that liquidation is a more expedient route to recovering value from your business investment.
Prepare your seller’s discretionary earnings :
For calculation of the selling price of your business, first, you will have to recast your business income statement into a statement of owner’s cash flow or a statement of seller’s discretionary earnings (SDE). Having been known by any of the names, the function of SDE is to provide the basis for sale pricing exclusively for the primary interest of the buyer.
Do the math to arrive at an early estimate of your purchase price :
Your asking price must be in line with prices of comparable business sales. Pay heed to the fluctuation in price estimations as the early price estimate will likely be adjusted before you present it. There are two reasons for this: first, you may not be the best person to assess the attractiveness of your business to buyers, which is why outside intermediaries and assessors are so valuable. Secondly, your asking price needs to be accounted for the fact that buyers negotiate downward. For instance, in the thousands of closed small business transactions reported to an analysis firm in Nevada each year, most Nevada business for sale deals are closed at about 87% of their asking price. Your asking price will need to account for that variance without stating a number so high that it reduces buyer’s interest and inquiries.
Do some price checking :
After arriving at your estimated purchase price, conduct the following research if you want to find any information regarding the market area, business category, and price range. The results will surely show what businesses like yours are going for and what separates one business from the next in terms of what the owner is asking from the business. Work with your sale advisors, including your broker if you’re using one, or with industry association contacts if available. This will help you to see how your pricing estimate syncs with the prices of recent comparable business sales.
