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Business Questions:
Question: If I’m wanting to sell my business, how do you decide what price to sell for?
Submitted by: Andrew
Answer:
Though the process of pricing a business can differ from business to business, the basic principals remain the same for the most part. There are three primary elements that need to be assessed.
The first, and perhaps the most objective element, is the net profit. In order to do this we gather the financial information for the business, apply adbacks as necissary and establish a reasonable estimate of what a new owner would be making in the business in its current state.
The second element takes into account the risks involved with its purchase. Even the best businesses come with a reasonable amount of risk and it is the risk that allows us to calculate the profit multiplier. For example, say your business has been running for only 6 months but the profits are good. A lack of profit history means that these profits, though good, cannot be assured and therefore a lower profit multiplier must be applied. Realistically, though the profits are our starting point for valuing a business, it is the risk that enables us to establish an eventual selling price. As to how the risk is used to do this- it is simply a matter of experience.
The third element pertains to context. We take into account the sale of similar businesses in the recent past and use that information to verify whether our calculations have resulted in a price that buyers are willing to pay. What does this mean? Well, once we’ve come up with a price for the business, if we complete our research and find that similar businesses are not selling for anything near the figure we’ve come up with, then it is reasonable to assume that neither will your business. It’s a saying that get thrown around a lot, but it is still true: A business is worth what someone is willing to pay for it.
I hope this answers your question Andrew.