Determining the selling price preparing business for sale


Many formulas and tools can help the business owner (BO) to determine the selling price for a business, there is no magic bullet that will come up with the absolute correct price for every instance. The final price ultimately depends on how much the buyer wants to buy, and how much the seller wants to sell.

Yet there are a number of ways to value a company and determine the asking price. For example, find out the selling prices of similar businesses in the area and use them as a starting point. Or contact the national trade association for the type of industry (if one is available). These organizations usually keep detailed statistics and are more than willing to provide information to members.

BO can also consider employing the services of a professional business appraiser. This may lend more credibility to initial asking price and allow the BO to keep the reins on sale-price negotiations.

Common valuation methods include:

Market-based valuation:

Frequently used by business brokers based on their past experiences selling similar businesses. The broker may recommend an asking price based on the sale prices of similar businesses in the area and industry. Although this is not a comprehensive valuation tool, it is quick, inexpensive and makes sense to buyers, so it’s common practice for the sale of small and medium businesses.

Asset-based valuation:

The valuation takes into account figures such as the book value and liquidation value of the business. These are considered bare minimums in business appraisals and are not generally used as the sole path to an asking price.

Earnings-based valuation:

This valuation takes into account historical financial figures, including debt payments, cash flows (past, present and projected) and revenues. Earnings-based valuations are often combined with asset-based valuations for a more inclusive appraisal.

Preparing a business for sale:

Selling a business can be the largest and most important deal of an entrepreneur’s career. Whatever prompts the sale, selling a business is a high-stakes transaction, with far-reaching financial and emotional consequences. In the best of all worlds, the owner begins to prepare his or her business for sale at least one year in advance. Start by assessing financial books with an eye toward creating audited financial statements and projections that illustrate the company’s revenue and growth potential.

Records should be formalized and should clearly document all transactions so that potential buyers can easily evaluate the company and so that a new manager can take over with minimal training.

Eliminate idiosyncrasies. The new owner will not want to face the customer who expects special treatment or, worse yet, be the ogre who cancels a long-standing verbal agreement with the company’s oldest customer.

Examine all supplier and customer contracts. Make sure terms and conditions will not expire or require renegotiation just as a new owner steps in. Terminate contracts that might trouble a potential buyer or that drain the company financially or serve little purpose.

Start codifying company policies and procedures that exist as unwritten rules. If necessary, create a procedure manual that documents exactly how to best run the business and be sure to include unspoken, undocumented techniques.

Review your real estate leases, especially if your business is tied to its location. Make sure the lease does not expire or require renegotiation at the same time you plan to sell the company. If the company’s location will discourage buyers, consider moving the location before placing the business up for sale.

The company assets, from property to warehouse inventory to employees must be fully evaluated. If there is a delay investing in computer upgrades designed to manage and control the flow of inventory, now is the time to modernize.

If company assets include real estate, separate or sell the property before the company hits the market. Real estate can devalue a business simply because it complicates the financial records, which in turn can make potential buyers hesitant to assume a new business with added expense.

Finally, don’t forget about employees. The loss of key employees during a sale can kill a deal. Key employees may be crucial to the new owner’s success, so it’s important to determine which employees are prepared to stay with the company during and after the transition. It is important that employees don’t hear about the pending sale of the company from a third party.