Let’s just get this out of the way: there is no one-size-fits-all formula for pricing your business. Anyone who tells you that there is, is probably about to ruin your chances of selling your business at its full value.
And here’s why: the price at which you take your business to the market is one of the main determining factors that can lead to a successful business sale. Your advertised price has a huge affect on everything from:
- Your target market,
- The perceived return on investment,
- The availability of finance,
- Your buyers’ level of trust in your business,
- The calibre of buyers you attract,
… and most importantly; it has serious implications when you get to the negotiating table.
All of those things put together can have a massive affect on your business sale so, quite simply, if your business price isn’t a strategically calculated figure, you’re shooting yourself in the foot. It can be the difference between selling and not selling.
So, given that minefield, how do you calculate how much your business is worth?
To start, you aren’t going to be able to do it without help. I should probably also say, given what we’ve already said, that you aren’t going to be given a formula at the end of this blog with an answer. What this blog does however, is point you in the right direction.
Here’s our recommended first step on how to value your business:
Most people’s first thought is to either get a business valuation or to get their accountant’s opinion. Though these are good options, there’s a much quicker (and cheaper) way to get some fairly accurate estimates.
My recommendation for the best first step would actually be to approach some business brokers for an appraisal. Now, this might seem a little self-serving (given that we are business brokers), but it is my genuine opinion (Plus, most good agencies will put together an appraisal for free).
Most business brokers’ appraisals are obligation free and business brokers are uniquely positioned in that they have first hand access to what businesses are selling for in the current market. Furthermore, if they are a reputable broker, the appraisal they give you will be geared towards a realistic selling price. Why? Because it’s in the broker’s best interest to advertise the business at the right price so they can sell it and get paid!
IMPORTANT: Picking the good agents from the bad is core to getting a good appraisal. Make sure you read to the end for tips on how to pick the right agents to produce your appraisal.
The reason you need to go to multiple brokers is that you want to get at least three price opinions for your business. If they’re all around the same price then your pricing decision will be easy. If however, the appraisals all come back very different then you’re going to need to make some hard decisions. Without business valuation training, the absolute best test you could do is the age old ‘sanity test’. This is a real test that even valuers use, but you can do it yourself.
For each appraised price, you need to put yourself in a buyer’s shoes and answer the following question as unemotionally and honestly as possible:
”Knowing what I know about my business;
its profits, advantages, disadvantages, benefits and drawbacks;
whilst considering the current economic climate and industry conditions
and comparing it to other businesses and investment opportunities…
would I pay this price for it?”
If your answer is a very quick ‘Yes’ without too much thought, then the price might actually be a little low.
If your answer is a resounding ‘No; I would invest this money elsewhere’, then the price is likely too high.
If however your answer is something more like ‘Yes, but only after thorough investigation and serious consideration’, then you have likely found a reasonable asking price.
||So, is that it? Well, yes and no. No, because of course you could study up and read through all 1000+ pages of a very thick and heavy valuations manual… but if you’re like most business owners I know then the hundreds of hours required to do so are not really available to you. Otherwise, the process described in this blog is the very process that I used to sell my own business before becoming a business broker (and before reading through all 1000+ pages of a very think and heavy valuations manual).
There’s no way to know exactly how the market will react to your price, so remember; listen to the market. All buyers will likely have concerns over price (obviously), but if buyers are telling you that the business is way over-priced and they are not interested in taking it further, then you need to be prepared to react to that feedback.
Do that, and you’ll be lightyears ahead of your competition.
By Zoran Sarabaca
Principal Xcllusive Business Sales Pty Ltd
Sell your business with Certainty.
PS. IMPORTANT: Read this to help you pick the right brokers for the appraisal.
The main variable of this whole exercise is picking the right brokers to appraise your business. Not all appraisals are created equal and you do need to be picky with the brokers who’s appraisals you trust. Here are four quick tips to help you pick the right brokers to approach for a good appraisal.
- Any good appraisal requires financial documents to produce. If the broker doesn’t ask for them, then find an agent who does.
- Stick to agencies with a low business to agent ratio. Do this by counting the number of businesses listed on their website and dividing it by the number of agents they have. If the website has 1000 businesses and only three agents, then those agents are not going to have the time to focus on individual businesses and as a result will often over quote business prices simply to list more. An over quoted price is not what you’re looking for.
- Avoid agencies with what appears to be very overpriced businesses. Take a look at their listings page, and if their prices make you scoff then maybe give them a miss.
- Avoid agencies with very high engagement fees. As of 2014, agency engagement fees up to about $2,500 – $3,000 are totally acceptable. If the brokerage is charging you $5,000 – $10,000 just to sign up with them, then their financial incentive is at the front end of the deal. This means that they make their money by signing you up as opposed to selling your business. Under these circumstances it is actually in their favour to over-quote you in order to sign you up and get the engagement fee.
Remember, this tip list is mainly to help you find the right agents to appraise your business. It’s not a be-all-end-all to help you choose the right broker… but it’s a good start.
DISCLAIMER: The information contained in this blog is for information purposes only. It is not meant to be considered as business advice. The points of view expressed represent reactions to the current business market and it should be noted that the market may be subject to change in the future. Reader’s specific circumstances may be different and have not been taken into consideration. Always consult with your professional advisors for any business advice.