Determining a Purchase Price
Deciding on the purchase price of a business is a crucial part of the selling process. Let’s say your business has been on the market for the last several months. The business is listed for $4M. While you are excited to sell at that purchase price, many businesses don’t sell at their listed purchase price. A key question you wonder, is whether your business will transact at that price?
The final purchase price depends on many factors. Such factors include the fair market value, the uniqueness of the business, marketing efforts to sell the business, industry trends, and the sources of financing available to the buyer.
Align the listing price with the fair market value
Ultimately, as the seller of the business, you need to ensure that the listing price is spot on with the value of the business. As such, it is important to seek out the professional assistance of a valuation specialist.
A valuation specialist will place a value on the business based on the concept of fair market value. Typically, a range of values is presented for the business. Even if the seller decides to list the business at a price point in the range provided, the buyer must be willing to pay for it.
In a typical negotiation, both the buyer and seller conclude to a value. As such obtaining a business valuation from a third party can help. It helps to ensure the valuation approach is the same for both parties and the value presented is fair market value.
Highlight the uniqueness of the business
When talking to potential buyers, focus on the uniqueness of the business and its ability to sustain profits. If your business has the potential for tremendous growth, back it up with quantitative research. Providing direction to the future owner for expansion opportunities and capturing market share can help. When choosing a business broker, be sure they have experience marketing your type of business. Just like a house, the better the picture, the more value a buyer will place on the business.
Identify industry trends
The industry your business operates in will greatly impact the purchase price. When a valuation professional is placing a value on your business, they will look at companies with similar operations that recently transacted.
Most businesses that transact are very similar in nature. So, when you are selling your business, identify the unique proposition of your business that is irreplaceable and exclusive. Highlight this in your marketing efforts to support the purchase price.
Consider the buyers financing options
There are many funding options when buying a business. Funding can often influence the purchase price of a business. Below are a few options to discuss with a potential buyer. You can gain a more in-depth understanding by reading our article on Financing a Business Purchase.
- SBA Loans: This is often a preferred source of funding because SBA loans are partially guaranteed by the government. This type of financing is highly sought after as it has low-interest rates and competitive terms.
- Commercial Loans: These are attractive to buyers as they have faster turnaround times. A commercial loan has a fixed term and payment and a down payment is usually required.
- Seller Financing: Many individuals prefer seller financing as it is often easier to negotiate between the buyer and seller. This is attractive as many buyers don’t have the cash necessary to pay a lump sum and bank loans can be difficult to get.
Negotiate the final purchase price
Overall, the finalized purchase price is often less than the asking price. On average, the purchase price is about 8% – 10% lower.
A business is not usually sold for the asking price unless there are multiple bids and the company has a unique business model. This uniqueness may include proprietary information, patents, etc.
For instance, recently a business sold for much more than the asking price because the land it owned had hundreds of shares in water rights. Only one of the businesses, who put in a bid was aware of this at the time and as such valued it much higher. Therefore, they offered more than what the business was listed at.
The better you position your business to sell, the quicker and more valuable it will be. A business valuation specialist can help in determining the fair market value and your unique value proposition. A business broker can also be helpful in creating an attractive listing and negotiating the purchase price. Ultimately the final purchase price will be what a buyer is willing to pay for the business.
Peak Business Valuation is here to help buyers and sellers determine a fair purchase price. We would love to talk with you about selling, buying, or financing a business. Questions are always welcome! Feel free to reach out by scheduling a free consultation.
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