Are you thinking about selling your business? One of the most important decisions to make is determining the listing price. Listing a business too low may leave money on the table. While asking too much, may put off potential buyers. And if it sits on the market too long at an inflated price, it may cause the ultimate selling price to be less.
Your business is only worth what a buyer will pay for it. As such, the asking price needs to align with how a buyer values the business. A business valuation can guide your listing price, but you should also consider market value, industry trends, marketing, and financing options available to the buyer.
Methods to Calculate the Listing Price
One of the simplest ways to determine the value of your business is by comparing it to similar businesses that have recently sold. A valuation expert uses databases of private market transactions to find similar businesses to compare the business with.
Another method valuation experts use is determining the total value of the business’s assets. These may include tangible assets such as equipment, inventory, and land. As well as intangible assets such as goodwill, intellectual property, brand recognition, etc.…. The downside of using this method is that it does not consider the future earnings of the business.
The most common method a valuation expert uses is industry multiples. Valuation multiples are calculations using ratios of business value to key financial indicators. Revenue and cash flow multiples are the most common. Multiples can then be compared to other similar businesses in the industry. If you feel your business has a unique value proposition, be sure to include that in the story you market to potential buyers and tell your valuation analyst.
Discretionary Earnings Multiple
One of the most common multiples to value a business uses the owner’s discretionary earnings. A valuation analyst will ask about what discretionary expenses the owner takes and then add them back to pre-tax income. After which they apply it to a multiple to determine the value of the business.
Discounted Cash Flow
This method seeks to forecast the cash flow the business will generate in the future and discount it to the present. Buyers generally offer more for a business if they can see their investment has a healthy return.
Other Factors Influencing the Listing Price
There is a multitude of other factors that will influence the asking and selling price of a business.
- Business operations
- Business location
- Competitive position
- The flexibility of terms & conditions
- Buyer financing options
It is important to note, a buyer may pay more than what the average market is willing to pay if to them it is worth more. But most often the selling price is lower than the listing price. Unless the market is hot and you receive multiple bids, you will not likely get your asking price. Obtaining a business valuation and reviewing the sales of market comparables is the best way to get a realistic idea of how similar businesses have sold.
Benefits of a Professional Business Appraiser
A professional appraiser or business valuation expert will use some or all the above methods to arrive at a potential listing price. The appraiser then weighs these methods based on their experience and statistical models. In the valuation report, they will then present a likely selling price or range of values for the business.
When looking to sell your business, it is wise to employ the help of a valuation expert in determining the listing price. They will bring objectivity and reason for the selling price. A valuation report can also give you a better sense of whether to sell your business. A report details your business’s strengths, weaknesses, and growth potential. Consult with a valuation professional today to determine a fair market price for your company.
If your business is not where you want it to be to sell, getting a business valuation can help you understand the value of the business today and identify opportunities to grow the value of the business.
Peak Business Valuation is a leading business appraiser in Utah. We help business owners determine a fair market price for their company. This will help guide you in setting a realistic listing price. Schedule your free consultation below or reach out via email.
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