Finalizing Your Asking Price: How To Price Your Business for Sale

Finding the right asking price for your business involves a blend of both subjective judgment and objective analysis. As you determine the true worth of your business, finding the right price requires a careful balancing act. As you carefully plan your exit strategy, a key question that arises is: What’s my business worth? And as you prepare your business for a sale, it is time to answer the question on every buyer’s mind as they think about a buying a business: What is the purchase price?

Steps to Determine an Asking Price for Your Business

Determining the asking price for your business is a multi-step process, and many sellers rely on the expertise of an M&A advisor or business broker. For business owner’s choosing the for sale by owner (FSBO) route, you’ll need to:

• Get your financial documents in order: Income/profit & loss statement, cash flow statement, balance sheet, and a statement of seller’s discretionary earnings (SDE)
• Estimate the value of your tangible assets
• Estimate the value using an earnings multiple
• Research comparable businesses

Doing the Math

When considering the sale of your business, keep in mind that the valuation estimate may not match the price you decide upon. This price will be based on various factors, including your verified annual earnings, the condition of your business, the terms of your sale offering, and advice from your sale advisors. Based on widely accepted valuation approaches, pricing your business will likely involve a formula that multiplies seller’s discretionary earnings (SDE) by an industry multiple, typically a number between 1 and 5, using this formula:

Once finalized, it will establish the asking price for the tangible and intangible assets of your business – probably not including such assets as cash, accounts payable minus accounts receivable, non-operating assets such as your car, or real estate owned by the business. When structuring the sale, you will either exclude those assets from the offering or sell them separately.

Making Price Adjustments

To finalize the price of your business, work with your sale advisors to consider the following adjustments:

• Have you accurately judged the attractiveness of your business, and therefore its earnings multiple?
• Will you be providing seller financing by accepting a portion of the business sale price over time and with interest – a condition that supports a higher price and in most sales leads to a higher asking-to-selling price ratio?
• Is your price in line with prices of comparable business sales?
• How much will the asking price be adjusted to account for price negotiations? Most buyers negotiate the asking price and for that reason, most businesses are offered at prices up to 20 percent, though more often 10-15 percent, higher than the price the seller expects to achieve. The aim is to state a price that accommodates the anticipated asking-to-selling price variance without stating a number so high that it reduces buyer interest and inquiries.
• Will the final price be adjusted to include the price of business-owned real estate, if any? Real estate is typically valued and sold separately and not included in the initial business sale price.

To establish a fair and accurate asking price, business owners should consider consulting a business broker or professional appraiser. Visit the BizQuest Broker Directory to find a broker to help you determine the asking price for your business and help you through the process of selling your business.