Guide To Plan an Asking Price for Your Business
It can be difficult to determine the asking price of your business. You won't get any interest if you set it too high. On the other hand, you risk losing money if you price it too low. In a dynamic marketplace, both the asking and selling prices of business-for-sale are subject to change. The buyer will assess your financial statements, industry-comparable sales figures, asset values, and return on investment. This will determine the price your business is likely to sell for.
Many sellers prefer to trust professional appraisals or business brokers who can help them. However, you can prepare for the unexpected by taking a few steps to estimate your costs.
1. Calculate the value of your tangible assets
Make a list of all of your physical assets, including furniture, fixtures, equipment, and inventory. Consider their age, condition, and cost of acquisition to determine a realistic value. This summation of all the values is called the liquidation value. This approach doesn't take into account cash flow, intangibles, and other factors. However, it will be less than the actual value for most businesses. Liquidating assets prior to the sale of the business may be the fastest and most cost-effective way of recouping value and exiting your business.
2. Get all your financial statements in order
To estimate the income-based value for your business, you will need to compile financial statements for the current year as well as the three previous years. Your accountant or bookkeeper can assemble the following documents.
Income statement:
Showing gross revenues, expenses, and bottom line profits or losses
Cashflow statement:
Showing how much money has been received and paid from your business and what business assets have changed.
Balance Sheet:
Showing all tangible assets and liabilities
The statement about the seller's discretionary earnings:
Showing how much your business makes after taking out discretionary and non-recurring expenses. Your accountant or bookkeeper will help you transform your income statement into a statement of the owner's cash flow (SDE) or seller's discretionary earnings. This information is used to determine the price of the sale and what buyers are most interested in.
3. Calculate the value by using an earnings multiple
Multiples can be used to compare business value and key financial indicators like revenue and cash flow. Multiples can vary depending on the business type and geographic location. Business values typically range between one and four times annual cash flow. Calculate your earnings multiplier by looking at key areas that will affect your business' future, like revenue trends, profit trends, and products, and customer base. To arrive at an estimate of the sale price, multiply your SDE with your earnings multiplier.
4. Search for similar businesses
Do some research after you have determined the estimated sale price. First, go to BizBuySell.com to search for other businesses that are available in your market, price range, and business category. Next, you can use BizBuySell's valuation report to query a database that contains past sales of small businesses and to show you comparable businesses.
It can be difficult to determine a selling price. Experts agree that income-based valuations, which look at key trends over several years of financial statements, are the best way to value a business. Business owners should consult a professional appraiser or business broker to use this method.
However, it is possible to estimate the asking price of your business by assessing tangible assets. You can also use earnings multiples or research comparable businesses. This will give you an idea of the value of your business and help you decide if it is worth selling.
