The idea of selling a business can be very exciting. You may envision getting a good cash price at the closing of your sale and then retiring on some private island with the money. Unfortunately, not every business owner is going to achieve great wealth after they sell their business. But that doesn’t mean you won’t walk away with a nice chunk of change either. You just need to figure out what price is right for the sale of your business.
It is better to be pragmatic when setting an asking price. Don’t assume there are a sea of buyers out there just waiting to overpay for ownership of your business, even if it is making money. There are so many variables that go into setting a grounded offer price. You need to consider all these variables carefully or else you will never find a buyer who will pay your asking price.
Below are 13 tips for setting a realistic asking price when preparing and pricing your business for sale. If you follow these tips, you should get more prospective buyers that send you their inquiries regarding the sale.
1) Determine Your Company’s Value
The number one most important thing to do is determine your company’s true value. This may require you to go to a professional business appraiser and/or business broker for a further consultation. They will want to review your income & expense statements, cash flows, balance sheets, and financial projections. Based on how successful your business currently is, they will give you an estimated value of its worth.
When you set your asking price for the business, try to keep it within plus-minus 10% of the company’s estimated value. Do not go over 10% or else you'll risk turning away most buyers.
Related: Online Business Valuation Tool
2) Determine the Value of Your Assets
Make sure you determine the value of your company’s assets too. These should be factored into the company’s overall value, but sometimes they are not. Both your tangible and intangible assets have value.
For example, if your company owns trademarks and copyrights for its branded products or services, these intangible assets alone could be worth a great deal of money. Don’t focus only on the cash flow of your business to determine its worth. You may have valuable assets which don’t directly get factored into the cash flow.
You’ll need to decide whether you want to include these assets with the sale of the company or not. If you decide to include them, make sure the prospective buyers know it. This will encourage them to pay a higher price for your company.
Related: Business Valuation Methods
3) Don’t Ever Get Emotional
Business owners make the common mistake of getting emotional over the sale of their business. This is understandable because they put so many years of hard work and stress into the business. Naturally, they’ll be eager to see a fair return on their investment. However, you cannot let your emotions guide your judgment. If you do, one of two things might happen.
First, you might set an unrealistic asking price that will never be accepted by any prospective buyer on the market. Once that happens, you’ll become panicked and think that your company is not worth what you thought it was. Then you will drastically lower your asking price so that you can sell quickly. This will likely cause you to lose money.
4) Find an Experienced Business Broker
If you have a high-end small business that you think you can get a lot of money for, then you might want to use a business broker to handle the sale of your business. The upside to using a business broker is they may have access to a network of financially qualified buyers. The downside is that you must pay a commission to the business broker if they successfully sell your business. This might be the only way to find a buyer who can afford a higher asking price, though.
Video: What's Your Business Worth? Easy Steps to Valuing a Business | Jon Hunt
5) Have Patience
You may have a very successful business that has a steady cash flow. Nevertheless, this doesn’t mean you’re going to find a buyer right away who will meet your asking price. The best thing to do is set a "down-to-earth" price and then just have patience. Do not feel tempted to lower your offer price just because the buyers aren’t coming fast enough. If you’ve done your homework and you know the price is right, then just have patience until you find the right buyer.
6) Seller Financing
When you think about your asking price, you need to consider whether the average buyer can afford that price. For instance, if you are requiring a 100% cash sale for your business, that is going to deter a lot of buyers away who don’t have the full cash amount available. In fact, most buyers probably won’t have the full cash amount to pay at the closing. If they do, they might not feel comfortable paying it. Then you’ll either need to lower the asking price or consider offering seller financing.
Seller financing is a great option to consider for your sale. Not only will you get more buyers interested in purchasing your business, but you will also be able to set a higher asking price too. Just be sure to set fair terms for yourself in the seller financing deal. You’ll want to maintain partial control over the company until the full amount is paid off. This will make it easier to reclaim total control in case your buyer defaults on their monthly payments to you.
7) Market Comparisons
Research the marketplace and look for other businesses for sale that are like yours. Review all the assets and valuations for those businesses and find the ones which are closest to matching yours. By studying what other business owners are doing, you will be able to determine a fair and realistic price for your own business. You can even take it a step further and research the businesses like yours which have actually sold to buyers. This should give you a clear indication of the right price. Just be sure to factor in the market conditions on the date of that sale.
8) Lender Valuations
If cash sales are not working out and you’d rather not do seller financing, then try to establish a relationship with a lending institution that you can refer to buyers. Many banks and other financial lenders have their own business valuation tools at their disposal. You can let a lender conduct a valuation of your business to determine what they think it is worth. Then you can show this valuation to your prospective buyers, so they can get a better idea of the risk factor. Set your asking price around this valuation to attract more buyers.
9) Consider Your Outstanding Debts
You may have reviewed your expenses when figuring out the value of your company. But if you have any outstanding debts, you need to decide if you’re going to pay them before the sale. If you let your buyer inherit these debts, they probably won’t want to pay a high price for your business.
The best way to settle this is to use the funds of the sale to clear the debts. The only problem is this will leave you with less money afterward. But at least your buyer will feel good knowing they won’t need to pay them. For this reason, you could possibly negotiate a higher asking price if they don’t inherit any outstanding debts.
10) Consider the Future Cash Flow
We have briefly touched upon cash flow projections already. If your business is currently growing and it looks like it is going to make bigger profits in the near future, then you need to make sure your buyers see the statements and projections which prove this. You can set a realistically higher asking price if the buyer sees how their investment could pay off in a couple of years.
On the other hand, if you cannot prove cash flow increases because your business is making little to no profits, then you must lower your asking price. Try showcasing your company’s assets to the buyer instead.
Related: Is My Business Sellable?
11) Don’t Try to Fool Your Buyer
Do not assume that new buyers will be dumb enough to purchase a business for more money than it’s worth. Business owners frequently make the mistake of settinga a high asking price and thinking some newbie buyer will pay it.
What you must understand is that a buyer is likely not going to be acting alone. They’ll probably have an attorney, appraiser, broker, and/or lender conduct their own valuation on your company first. This is especially true in the case of a lender because the buyer may be borrowing money from a bank to purchase your business. Their lender is going to want to know if this is a good investment for their potential borrower. So, they will find out the true value of your company and let your buyer know it. Therefore, don’t trick the buyer into thinking your company is more valuable than it is. They will find out the truth eventually.
12) Figure Out Why You Want to Sell
What is the reason for selling your business? Are you looking to retire or reinvest in another business? Perhaps you’re looking to bail out of a failing business before it collapses completely. The reason for selling your business will make a difference in how grounded your asking price should be.
Obviously, a failing business is not going to generate a lot of interest. The only thing you could do is set a cheap price for its assets only. If you’re looking to retire or reinvest, calculate how much money you will need to accomplish this. Compare this amount to what your company is worth and see if it is a realistic price to set.
13) "Make an Offer" Asking Price
If you simply cannot figure out a reasonable asking price for your business, let the prospective buyers come and decide for you. Set your asking price to "Make an Offer" so that buyers can send you their own offers that they think is fair. Wait until you get a dozen offers and see if there is a common price range between them. Sometimes you’ll have buyers doing their own due diligence before coming up with a price offer. This can also save you time and money as the seller.
Of course, it is a good idea to know what your business is worth so that you will only choose fair offers. In some cases, you may end up getting an offer which is higher than what your company is worth. Again, it all depends on the buyer and how badly they’re willing to acquire your company.