Deciding on the optimal asking price to sell your business is one of the most critical elements to orchestrate an exit strategy that meets your goals. Yet many owners struggle with how to accurately value their life’s work. This can lead to deals that fail to maximize owner profits or never materialize at all. Given the complex mix of quantitative and qualitative factors impacting private company valuations, determining a figure that attracts buyers requires thorough research and analysis across multiple areas.
Financial Records & Performance
According to experts such as CGK Business Sales. one of the most important elements is analyzing your company’s financial records and overall performance. Examine at least the past 3 years of income statements, balance sheets, profit/loss statements, and cash flow. Identify trends in profits, revenue growth, expenses, assets/liabilities, and other key monetary metrics. This provides concrete support for your valuation. Also, assess non-financial factors like stability, growth potential, climate, etc.
Research and compare averages for standard financial ratios in your particular industry. Common metrics are Price-to-Earnings, EBITDA multiples, as well as sales multiples. See where your business falls in relation to competitors. Industry averages provide benchmarks to gauge if your valuation is aligned with broader market norms. If your ratios exceed averages, it supports pricing at a premium.
Appraisal of Assets
Factor in the total appraised value of tangible assets like real estate, facilities, equipment, inventory, intellectual property, brands, operational assets, etc. The worth of physical and intangible assets prominently influences overall business value. Be sure to use fair market asset values, not merely book values listed on balance sheets.
Discounted Cash Flow Analysis
Forecast net cash flow over the next 5+ years, applying expected growth rates and sales projections. Then, discount these future cash flows back to the present at a chosen rate tied to your cost of capital or desired rate of return. This method particularly helps for highly stable, predictable cash flow streams. Use conservative growth estimates in forecasts.
Comparison of Recent Sales
Look at the types of valuations received in recent sales of comparable businesses. Be sure examples are as similar as possible in location, size, profitability, customer base, assets, and growth rate. Normalize these transaction prices to financial metrics like EBITDA or net income for apt side-by-side comparisons.
Consult Business Brokers
Those who specialize in selling companies can provide knowledgeable guidance on pricing for maximum sale potential. Experienced brokers bring wider business knowledge and involvement in multiple prior deals. Though they bring bias towards higher pricing, most will still give realistic ranges grounded in precedents.
Because brokers directly facilitate business sales daily across multiple industries, they grasp how subtle factors influence buyers in bidding and price negotiations. Let them tour facilities, review operations and records, then discuss what distinguishes your company to command higher valuations. Thorough vetting by several brokers provides more data points to help set an optimal, justified price. Their appraisal forms and sale comparables also strengthen pricing support. With added perspectives into the actual offer behavior of business buyers, engaging brokers increases valuation accuracy and exit success.
The right selling price aims to balance maximizing your purchase price with minimizing time on market. Set pricing too high and the business may languish without buyers. But pricing too low leaves money on the table. Do thorough research on all the above dynamics to set an optimal value. Be prepared to negotiate some from initial asking price. Keeping expectations flexible helps secure the win-win sale you desire.