Bridging the Way BayState Business Brokers blog

How to Price a Business, Part 1

by | Jan 25, 2012

When you are ready to sell your business, one of the most important decisions to make is what price to ask for your business.  If you price your business too high, it will sit on the market.  If you price your business too low, you give away money.  How to price a business is an important factor in selling a business.

We offer a free selling price estimate to an owner who is thinking of selling their business.  This methodology uses the sales and owner’s cash flow from the company and information on what comparable businesses sell for to estimate the selling price.  This is the “market approach” to appraise a business and is one of the three approaches used in a full appraisal.  This method is most helpful to estimate the selling price of businesses in which there are many comparable sales.

How to price a businessAnother way to price a business is to use a full business appraisal.  In addition to the market approach, the appraiser uses the asset approach – what the assets would sell for in an orderly liquidation – and the income approach – pricing the business as a multiple of the income.  Full appraisals are particularly useful to price a business when there are not many comparable sales.  If they are prepared by an independent, accredited appraiser (which ours are), they give credibility to the asking price.

On the average, businesses sell for 15% to 20% less than the asking price.  But, this is not always true.  If priced correctly, a business may sell at the asking price or above it.  Selling a business above the asking price is more common if there is more than one buyer making offers and the price is bid up or the business has better sales and income since it was appraised and put on the market.

In the sale of larger businesses, it is common to market the business without a price.  There are two reasons for this.  First, it is thought by some that asking a specific price may limit the selling price.  Secondly, the buyers tend to be more knowledgeable and have their own way of arriving at a price to offer.  They don’t need the guidance that a price provides.  It should be noted, however, that even with the sale of larger businesses without a price, buyers usually want to have some idea of how much the seller expects.  They don’t want to waste their time analyzing a business only to find that the seller’s expectations are well above the price they would pay.  In my experience, businesses marketed without a price tend to receive fewer inquiries.  This supports the observation that buyers are looking for guidance on the price.

The range in selling prices of businesses is significant.  The place to start is with a business appraisal – either the free market approach appraisal we offer or a full appraisal by an accredited appraiser.  As a general rule, we price a business at the higher end of the range that it might sell for.  It may sell for that price.  Also, we have room to negotiate if necessary.



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