Though many formulas and tools can help you determine the selling price for your small business, there is no magical solution that will come up with the absolute correct price for every instance. The final price ultimately depends on how badly the buyer wants to buy and how strongly the seller wants to sell.
Yet there are a number of ways to value your company and determine your asking price. For example, find out the selling prices of similar businesses in your area and use them as a starting point. Or contact the national trade association for your industry, when applicable. These organizations usually keep detailed statistics and are more than willing to provide information to members or potential members.
You can also hire a professional business appraiser. This may lend more credibility to your initial asking price and allow you to keep the reins on sale-price negotiations.
Common valuation methods include:
- Market-based valuation. This method is frequently used by business brokers and is based on their past experiences selling similar businesses. The broker may recommend an asking price based on the sale prices of similar businesses in your area and industry. Although this is not a comprehensive valuation tool, because it is quick, inexpensive, and makes sense to buyers, it is common practice for the sale of small businesses.
- Asset-based valuation. This takes into account figures such as the book value and liquidation value of the business. These are considered bare minimums in business appraisals and are not generally used as the sole path to an asking price.
- Earnings-based valuation. This method takes into account historical financial figures, including debt payments, cash flows (past, present, and projected), and revenues. Earnings-based valuations are often combined with asset-based valuations for a more inclusive appraisal.
For further information, read What Is a Selling Memorandum in Connection with the Sale of a Business?
Once you set up your valuation to maximize the selling price for your business, you’ll want to also start planning for the tax consequences of the sale. Read Tax Concerns When Selling Your Business for an overview of the factors that will determine how much you owe to the government.