It’s important to note that there is no universal method for determining the price of a business. Anyone who claims otherwise may be hindering your ability to sell your business at its full value. The price at which you present your business in the market plays a significant role in the success of the sale.
It can impact factors such as:
- your target market,
- the perceived return on investment,
- the availability of financing,
- the level of trust buyers have in your business,
- the quality of buyers you attract,
- and the outcome of negotiations.
All of these elements can greatly impact the sale of your business, and if your pricing is not carefully considered, it can be detrimental to your success. Ultimately, having a strategically calculated price is crucial in ensuring a successful sale.
So, given that, how do you calculate how much your business is worth?
To begin with, determining the price of your business is not something you can do on your own. As previously mentioned, there is no one-size-fits-all formula for pricing a business. While this article may not provide you with a specific answer, it aims to guide you in the right direction.
Here’s our recommended first step on how to value your business:
One commonly considered option for determining the price of a business is to obtain a business valuation or get an opinion from an accountant. However, there’s a more efficient and cost-effective way to get reasonably accurate estimates. An alternative that we would recommend as a first step is to seek appraisals from multiple business brokers. This may seem self-serving (especially if the speaker is a business broker themselves) but it is a genuine recommendation.
Business brokers have the unique advantage of having direct access to information on the current market values of similar businesses. In addition, a reputable broker’s appraisal will be geared towards a realistic selling price, as it is in their best interest to price the business correctly to secure a sale and earn their commission. However, it’s crucial to be careful in choosing a reputable broker for the appraisal.
It’s important to approach multiple brokers for appraisals in order to obtain at least three price opinions for your business. If the prices are relatively similar, the pricing decision will be straightforward. However, if the appraisals vary greatly, then it’s necessary to make some tough decisions. One test you can do to determine a reasonable asking price is the “sanity test,” which is often used by valuers.
For each appraised price, you need to put yourself in a buyer’s shoes and answer the following question as unemotionally and honestly as possible:
”Knowing what I know about my business;
its profits, advantages, disadvantages, benefits and drawbacks;
whilst considering the current economic climate and industry conditions
and comparing it to other businesses and investment opportunities…
would I pay this price for it?”
If your answer is a very quick ‘Yes’ without too much thought, then the price might actually be a little low.
If your answer is a resounding ‘No; I would invest this money elsewhere’, then the price is likely too high.
If however your answer is something more like ‘Yes, but only after thorough investigation and serious consideration’, then you have likely found a reasonable asking price.
So, is that it?
Well, yes and no. No, because of course you could study up and read through all 1000+ pages of a very thick and heavy valuations manual… but if you’re like most business owners I know then the hundreds of hours required to do so are not really available to you. Otherwise, the process described in this blog is the very process that I used to sell my own business before becoming a business broker (and before reading through all 1000+ pages of a very think and heavy valuations manual).
It’s essential to keep in mind that the market’s reaction to the price you set is uncertain. It’s important to listen to feedback from potential buyers, especially if they express concerns over the price of the business. If they indicate that the price is significantly overpriced and they are not interested in pursuing the sale, it’s necessary to consider adjusting the price accordingly. This approach can give you an edge over your competition.
Want more information on how much your business is worth?
Get in touch with us today and one of our experienced business analysts will run you through the process.