There are several steps to prepare your business for sale, from organizing your finances to ensuring the right staffing is in place for a smooth transition. But one of the most important pieces of the puzzle can be choosing an accurate sales price.
That’s easier said than done with so many varying factors involved with a business. Learn how to price a business for sale in order to attract the right buyers and close a deal you feel good about.
Key Points
• Pricing a business means determining its true market value to attract serious buyers, often with help from a third-party valuation.
• Accurate pricing is critical: overpricing can scare buyers away, while underpricing may leave money on the table.
• Business valuation is influenced by industry trends, target buyers, risk management, and future growth potential.
• Common valuation methods include asset-based, earnings-based, and market-based approaches.
• Organized financials and, in some cases, a professional appraiser can help strengthen credibility and support a realistic asking price.
What Does It Mean to Price a Business for Sale?
Pricing a business for sale is the same as calculating its value in order to advertise to potential buyers. Getting a third party valuation can be beneficial to make sure the price is realistic for you and attractive to someone buying a business.
Why Accurate Business Pricing Matters
Accurate pricing for your business can attract the right buyers and increases the chances of finalizing the sale. If you overprice the business at the start of the process, you run the risk of a potential buyer backing out after reviewing the business financials. Underpricing your business, of course, could lead to a quick sale but at the risk of missing out on additional money.
Key Factors That Influence Business Valuation
There are several components to consider when learning how to value a business before selling.
• Industry trends: The business’s industry affects how much buyers are willing to pay. If the market is growing, you could be more aggressive in your pricing. But if there’s volatility in your industry, then buyers may expect a lower price.
• Target buyer: There are several different types of buyers in the business arena, which could impact the details of the sale. A larger company, for instance, may want to acquire your company for growth but may not keep upper management employees. A private equity or family office buyer, however, may want a turnkey business to take over for cash flow.
• Risk management: Many buyers want assurance that the business will continue to operate smoothly after the purchase. This usually means you need organized financial records, a low risk of legal issues, and employees who can continue to manage the business after the owner is gone.
• Growth opportunities: Being able to communicate the strength of the company along with future growth potential can also justify a higher sales price.
Common Methods for Pricing a Business
Explore these business valuation formulas when considering a price for your company.
Asset-Based Valuation
This type of business valuation centers around the assets owned by the company after accounting for any outstanding liabilities such as equipment financing balances. Potential assets to consider include:
• Land and real estate
• Machinery
• Equipment
• Furniture
• Technology
Calculate the current market value of each asset. Land and real estate, for instance, are likely to increase in value over time, while equipment or technology may depreciate.
Earnings-Based Valuation
This valuation option focuses on expected future income each year. Here’s a business valuation formula to start with:
Value = Benefit / Required Rate of Return
For the benefit, you could use annual net income, and then a rate of return that’s normal for your industry.
Let’s say your business cash flow is $200,000 annually after salaries and other operating expenses — that’s the benefit. Now let’s say a buyer will expect an annual rate of return of 20%.
You would find the business value by dividing $200,000 by 20% (or 0.20), which comes to $1 million.
Market-Based Valuation
A market-based valuation compares your business to recently sold comps, similar to how residential real estate is often priced. Using transaction data, you would calculate your business value based on how similar it is in size, operations, services and products, location, and more.
You may have difficulty finding comparable data for this method, but the number can be compelling if you do get real numbers on companies that have already sold.
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How to Prepare Your Financials Before Pricing a Business
Before any potential buyer will make an offer, they’ll likely expect to look at your business financials for at least the three previous years.
Organize your bookkeeping, financial statements (including business checking account statements and outstanding business line of credit or loan balances), and tax returns for quick and easy access. Also include any information that showcases the health of your business, such as growth initiatives or customer retention data.
How to Determine an Asking Price
How do you value a business that’s fair to both parties involved? The valuation is a good starting point, but that doesn’t necessarily have to be your sales price. Other factors, like industry trends and growth opportunities specific to your business, may justify a higher or lower asking price.
Look at other recent sales in your industry to see how desirable the market is right now. It may be realistic to expect a sales price under the asking price, or you may discover you’re in an industry courting multiple bidders. This information gives you helpful context in how aggressive to be with your pricing strategy.
When to Hire a Professional Business Appraiser
Hiring a professional business appraiser can give your sales price more significance because it comes from a third party source. Plus, you’ll feel confident that you’re suggesting a realistic figure to avoid losing money on a potential deal or overpricing so much that you’ll drive away buyers.
Potential appraisers include:
• Accounting companies
• Business brokers
• Investment banking firms
Mistakes to Avoid When Pricing a Business
A few common mistakes can impact the sales price of your business and how quickly it sells.
• Guessing the value of your business: Take the emotion out of the valuation process and use an actual formula to justify the list price.
• Leaving business financials in disarray: Buyers may be hesitant to purchase if your financial statements aren’t current, accurate, and organized. Strong record keeping can make it easier to ask for a higher sales price.
• Forgetting soft assets: It’s easy to value hard assets, but don’t forget to include the value of intangible assets as well, such as your CRM and intellectual property.
• Avoiding a plan for debt: Any outstanding debt from a small business credit card or other sources can be a sign of potential risk to buyers. Consider the business’s debt-to-equity ratio — the lower, the better in the eyes of a buyer — and consider paying down balances before you sell.
The Takeaway
Finding the right price for your business is an important part of the sales process. It sets the tone for the types of buyers you’ll attract and serves as a springboard for negotiations. If you need help financing a valuation or other business initiative before you sell, a small business loan can help.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
How do you determine the value of a small business?
There are several methods you can use to perform a small business valuation. The most common ones include: asset-based, earnings-based, and market-based valuations. The best option depends on the type of business you operate.
What documents do you need to price a business for sale?
You typically need the last few years of financial statements, tax returns, debt information, and any details to demonstrate the business’s growth opportunities.
What valuation method is most accurate for selling a business?
No valuation method is considered more accurate than another. Using an external appraiser can help you price your business accurately while also giving potential buyers confidence in a third-party opinion.
How far in advance should you prepare to sell your business?
You should start preparing to sell your business at least one to three years in advance. This gives you time to improve financial records, boost profitability, streamline operations, address legal issues, and position the business attractively for buyers, which can help maximize valuation and ensure a smoother sale process.
Do you need a business appraiser to price a business for sale?
It’s not necessary to use a business appraiser to price your business for sale, but you may get a more accurate number that can lead to a faster and better quality closing.
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