Price your business to sell.
Objective
Price your business in a way that will attract multiple bidders. Pinpoint the price of your business within a low range and high range based on your financials, unique value proposition, and the comparables and multiples of similar businesses recently sold.
Tasks
Prepare a defensible business valuation using industry-accepted methods. You can do this yourself or retain a business valuation expert. Your accountant or business broker can also help with this step.
Best Practices
The biggest mistake sellers make is to over-price their business from the outset. Most sellers have the mindset, “I’ll start high and let buyers negotiate me down.” It’s counter-intuitive, but the better strategy is to start with a price range and let buyers bid you up. If you set and advertise a high price, it may discourage qualified buyers from even trying. If you price within a range, you have a better chance of getting multiple bidders to the table who will compete by offering the high-end of the range.
In any case, the true value of a business can only be discovered in due diligence, after a buyer signs the NDA and starts to engage with you.
There are many different methods for valuing a business, depending on the purpose of the valuation. The most common method used by small business buyers is comparing your business against businesses of similar size and scope. They use industry averages. This data is easy to come by. See the section below, Tools and Tips.
The problem with the comparable method is it fails to account for unique valuation boosters like intellectual property, exclusive territories, or exclusive client relationships, and other advantages and attributes that similar businesses do not have. From this perspective, the comparable method is good for pinpointing the low range of the price. The unique advantages and attributes of your business help determine the high range of the price you could sell it for.
There are also different types of buyers with different needs and motivations. We’ll get into this in Step 8, Buyer Prospecting, and Step 9, Buyer Qualification. Suffice it to say that in the end, the price of your business is what a particular buyer thinks it’s worth, not what you think it’s worth or what the comps and multiples indicate. Price is always a function of value in the minds of buyers.
Valuation is also a function of deal structure. This factor is often overlooked by sellers and their brokers when pricing a business. If a buyer is going to pay cash, he or she will expect a discount off the listing price. On the other hand, if the buyer expects seller-financing, hold backs or an earn out (discussed later in Steps 11 and 13), the price should be set higher. Since it is impossible to know exactly how the deal will be structured in advance, it’s best to have a price range in mind as opposed to a set, “take it or leave it” price.
Tools and Tips
There are a number of good sources for benchmarking the price of your business. You can do it yourself or hire a broker or business valuation expert. These are some of the better tools available to help you determine the low end and high end of the price range for your business:
Value Source: https://www.valusource.com/
Value Source offers a variety of tools, including an online valuation system designed for business owners. https://www.valusource.com/products/business-owners/online-business-valuation/overview/.
Business Valuation Resources: https://www.bvresources.com/stakeholders/business-owners
BVR provides online valuation database and DealStats on both private and public companies.
BizEquity: https://www.bizequity.com/smb
BizEquity provides valuations based on 143 data points.
Business Reference Guide (BRG): https://businessreferenceguide.com/
BRG provides a book and online service that shows industry averages for small business sales. It’s one of the most used resources among business brokers.
BizBuySell Valuation Report: https://www.bizbuysell.com/business-valuation-report/
If you list your business for sale on BizBuySell (more on this in Step 6), you can get a free basic valuation report.
All these sources can provide you with a decent baseline for a few hundred dollars. Remember, it’s just a baseline. There are likely extenuating factors that could positively or negatively impact your valuation, from a buyer’s perspective. It’s a good practice to get a valuation from several sources, then average them.
Hint: some business brokers will prepare a valuation for FREE, hoping you will then list your business with them – not unlike realtors who will prepare a free Comparative Market Analysis (CMA) when trying to list a home. Just be careful not to sign an exclusive listing agreement with the broker unless you are prepared to do so and believe the broker is the right fit for your business.
Two additional tools are the Owner Estimate of Value (OEV) and Seller Discretionary Earnings (SDE) Worksheet.
Owner Estimate of Value (OEV)
The OEV is modeled after a Broker Opinion of Value (BOV), commonly used by small business brokers to estimate the price range for a business they are selling. You can use it to prepare your own valuation. Depending on the results, you can share it with prospective buyers to explain your rationale for the price you are asking or keep it confidential and negotiate with confidence knowing what your business is worth at a minimum.
Seller Discretionary Earnings (SDE) Worksheet
The SDE Worksheet is a good tool for figuring out what the business really makes. Most small business owners run expenses through the business that a new owner would not have. This includes things like auto payments, mobile phone charges, life insurance and donations. The business may also be employing one or more family members in positions that would not necessarily be needed by a new owner.
The SDE Worksheet is the art of documenting all these expenses and adding them back to show true earnings. Many small businesses sell for 2.5x to 3.5x earnings, so this is a handy tool to help you justify your price with prospective buyers.
Make Versus Buy Analysis
The best advice I can give you is to estimate what it would cost a company to replicate your assets and advantages, rather than buying them. Additionally, how long would it take them? The ‘time-value’ of money and the cost to capture your customer base and market share are also important considerations.
Good advisors can help you perform this analysis. It’s often difficult for an owner to be objective. Your price should be less than what it would cost a buyer to replicate at their expense or acquire another business with similar attributes.
Summary
Preparing a business valuation will provide a baseline for a defensible price range. A business that is priced more than 20% of the high end of the range will likely be difficult to sell. It would need to have extraordinary advantages and attributes that others in the same class do not have.
There are many ways to boost valuation prior to listing the business for sale. Your best bet is to reach out to professionals who specialize in exit strategies. A Good exit planning advisor can more than pay for himself or herself by increasing your valuation by 20%-30%. Then perform a make versus buy analysis.
Be realistic about your price and you will have a much better chance of selling your business!
Examples
- Owners Estimate of Value (OEV) Worksheet
- Sellers Discretionary Earnings (SDE) Worksheet