A Guide for Determining a Reasonable Price for Your Small Business
There is a considerable difference between determining the value of a privately-held company and a publicly-held company. Topping the list of considerable differences is the fact that privately-held companies do not have audited financial statements. When owners of privately held companies are thinking about a potential sale, one of the most important factors to consider is business pricing.
Determining how much the business is worth can be a challenging yet important task to ensure both the seller and buyer can agree on a fair price. This long process includes looking at existing income statements and tax returns, physical assets, debt, liabilities, trends in revenue and expenses, market competition, and any other influencing factors that could affect the value of the business. Let’s take a look at how the owners of privately held companies should proceed in this process of establishing a reasonable price for their company and how business brokers can help along the way.
Private vs. Public Company Costs
An audited financial statement is a costly endeavor. In order to avoid the cost, many companies simply don’t go public. Of course, it should be noted that publicly held companies, as the name indicates, reveal much more about their finances than their privately held counterparts do. Privately held companies are often seen as being more mysterious whereas publicly held companies are considered more “open.” This gives private companies more flexibility in terms of pricing, which can allow them to potentially yield a greater profit upon the sale of their business.
Determine a Price for Your Business
Business owners looking to sell their business will, of course, want to address the fact that their company lacks the public information associated with publicly held companies. Providing prospective buyers with as much verified information about your business as possible is one of the fastest and easiest ways to overcome buyers’ concerns. A smart move for any business owner is to work closely with their accountant to go over the numbers and create an easy-to-understand presentation for prospective buyers. This should serve to allay many of their concerns.
To ensure you receive a fair asking price, it is helpful to enlist the help of an accountant or other financial advisor who has familiarity with the current pieces of your business and its valued assets. The estimated worth of your business should take into account factors such as recent sales figures, prospective buyer demand, expected future earnings, the appraised value of inventory, land, and buildings, depreciation rates, and net book values. You need to find the perfect balance between setting a competitive yet realistic financial goal. It can pay dividends in finding interested buyers quickly and getting the most for your finances when selling a privately owned business.
Working with your accountant is only the first step in providing prospective buyers with the information they need to feel comfortable. The second step is to work with an outside appraiser or another expert who can determine the value of your business. After that, you’ll want to decide on what your market price will be, as well as your “wish price,” or the price that you would ideally want. You should also determine your “rock bottom” lowest price. You, as the owner, need to have this information ready to go as it will greatly facilitate and streamline all negotiations.
Appeal to Buyers
When pricing your business, it is important to remember that the buying market will be weighing its options carefully. They need to feel like they are getting good value and that participating in this business transaction will benefit them. Work hard to make sure your pricing appeals to potential buyers and what they value. Otherwise, potential buyers may shy away from a possibly great opportunity due to an unappealing price point. When buyers are reviewing materials and working to determine what price they are willing to pay, they will look at a wide range of factors including:
- – Product diversity
- – The size of your customer base
- – Potential competitors in the area
- – Competitors on the horizon
- – Potential disruptions to your business, such as supplier problems
- – The stability of your earnings
- – The stability of the market
- – Need for capital
Different buyers may place differing levels of emphasis on certain areas, but you can be certain that the aforementioned areas will be examined with care. The process is undoubtedly rather complex. This complexity underscores the need for professional assistance and the perspective of others.
How to Achieve the Best Price for Your Business
Ultimately, the market will determine the sale price of your business. For business owners, the first and most important step is to work closely with professionals such as accountants, appraisers, Business Brokers, and M&A Advisors to establish the price of your privately held business. You can count on business broker professionals to help properly organize the facts and numbers that support that price.
Consult Business Brokers for a Smooth Transaction
Hiring a business broker has many advantages for the individual, or company, looking to buy or sell a business. Working with an experienced broker can save time and money during the transaction process and increase the chances of getting the best price possible. Brokers possess valuable market intelligence that allows them to provide clients with up-to-date market trends, perform competitive analysis, and showcase businesses appropriately. With their expertise in valuation and negotiation, they can help find potential buyers, evaluate offers, and secure a successful closing. Additionally, brokers simplify legal paperwork by ensuring its accuracy and comprehensiveness.
Trusted Georgia Business Brokers
The Business House, Inc. is a one-stop shop for all industry needs related to business transitions with over a century of experience in the field. We put emphasis on confidentiality when negotiating transactions to ensure utmost privacy while providing unmatched results. Our talented team of Georgia business brokers is ready to assist with the daunting task of selling your business. With assistance from our experts, setting a great price for your business will be a much less stressful process.