What your business can sell for is a more nuanced and complex question than ‘what is the business worth’, and to understand what your business could sell for, we need to explore how you should price your business.
Ultimately your business is worth what someone is willing to pay for it, but what someone is willing to pay is more about how your business is positioned, marketed and priced than it is to do with what is the tangible value.
As a business owner, you know that pricing your products and services can be a complex task. More complex than simply understanding the product's tangible value.
Pricing a business is just like pricing any other product
The circumstances leading to your decision to sell your business can directly influence how you choose to price your business. Essentially how quickly do you need to sell it, and how much money and effort do you want to invest?
What do you want to optimise for:
Obviously, the longer lead time you have to sell the business and the more money and time you are willing to invest can increase your chances of getting a higher return (but not always).
It can take anywhere between 3 to 5 years if your looking to sell your business for a significant amount and so it is worth starting to prepare early (even before you are contemplating selling).
There are many types of buyers out there, all of whom will offer you a very different price for your business.
Just like when you’re pricing a product or service, start by making a list of your target buyer. What are they looking for, and what within your business would they find valuable?
Are they investors looking for opportunities that will provide them with high returns?
Are strategic buyers looking to buy your business to give their larger business or portfolio something it is currently missing?
Are they Business Flippers looking for a bargain that will offer you a quick exit but will discount some of the hard work and money you have invested into the business?
We talk more about understanding your buyer type in this article.
Knowing your objective will help inform the kind of buyer you need to target.
We talk more about knowing your potential buyer here
Your buyer type will, in most cases, informs how you sell your business. Investors and strategic investors will be more receptive to being approached by a business broker or firm specialising in sales and acquisitions. A flipper will avoid the fees and look for businesses on online platforms like (aptly named flippa.com).
If you do choose to engage a professional or list on a site like Flippa be aware of the various fees involved and make sure to include them in your purchase price.
As with any pricing exercise, you need to assess what your competition is selling for and if there are any industry standards and best practices to be aware of before setting a got-to-market price for your business.
Some industries simplify pricing by providing an industry-wide standard for valuing businesses. For example, it is very common in the real estate industry to value a business by applying a simple multiple of the number of houses under management.
A broker or account can help identify if your industry has any common standards for valuing businesses like yours.
Lastly, identify businesses comparable to yours that have sold recently and use their sale price as a guide.
It is common to specify a range when advertising the price of your business, similar to when listing a house or other large asset.
The range can help attract the right buyer, weed out any time wasters and provide the framework for a bidding process between multiple buyers, which will give you the most leverage and the highest result.
Ultimately the price guide sets the tone, the negotiation will endure the highest actual purchase price.
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