According to industry analysts, only about 30 percent of all businesses for sale actually sell. These are not the most encouraging odds if you are trying to sell your business, but there are some ways to get an advantage over the competition. One way of doing this is learning how to price a business to sell. Business valuation is probably the most difficult part about selling a business, and most people know very little about it. The method you use to price your business will depend on the type of business you’re in, where you are located, your cash flow, and even your competition.
Here are a few key ways to beat the odds and price a business to sell – even in a shaky economy:
- Approach the business by looking at it from the perspective of the marketplace. This will require a close examination of supply and demand for your products and services and an honest analysis of where your business fits into the whole.
- To conduct a business valuation, look for tools that pertain to your industry, which will give you a good idea of how similar businesses handle valuation. No two companies are identical, and even businesses with the same business model may be serving different markets, with one realizing a better return on investment than the other.
- Start with your business assets and view them in one of two ways – their “liquidation value” or how much they would be worth in a fire sale, or their “income capitalization” value, which projects future income based on past success. Keep in mind that a company light on assets may have a very loyal and large customer base, which may be of more value than a lot of business assets.
- Look at your company’s cash flow and follow the money. This can be done by viewing the income through the lens of “owner benefits” or “discretionary cash flow” model, which adds the owner’s salary and other cash-related benefits, along with pre-tax profit, to arrive at an “adjusted net income” and then factors in depreciation and interest.
- Calculate a multiple of the cash flow figure by an industry specific number, which is usually between 1 and 3, and arrive at the value for your business. This exercise should help you learn how to price a business to sell without making it to expensive.
- Finally, remember to factor in the “terms of sale”. The terms will specify how much money is exchanged and when. If you are offering seller-assisted financing, then the price might be a lot higher than a cash-only sale. Find out more about how to price your business to sell by contacting a business broker with experience in business valuation.