Determining Your Small Business Selling Price

There are many tools and formulas that can help you determine the selling price of a small business, but there is no magical solution that will come up with the absolute correct price. The final price that someone is willing to pay for a business all depends on how badly the buyer is willing to buy the business or how strongly the seller wants to sell the business.

But there are some ways to value your business and determining the asking price. For example you could find a similar business that has been sold recently and finding out the selling price. You can use this selling price as a starting point for your business.

Another example of a way to finding out a business selling price is to contact the national trade association for your industry and asking them for statistics on business selling prices that are similar to your business. Again use this price as a starting point for determining your business selling price.

You could also hire a professional business appraiser. These business appraisers determine the business selling price in a similar way as described in the previous two examples, although they have other methods (see below.) The plus point of hiring a professional business appraiser against determining the selling price yourself is that it may have more credibility to your initial asking price. This in turn will keep the sale-price negotiations to a minimum.

Some common valuation methods used by business brokers are:

1. Market-based valuation

This method is often used by business brokers. The method is based on the business broker past experience of selling similar businesses. The business broker recommends an asking price based on the sale of similar businesses in your industry. It is a common practice to use this method for the sale of small businesses, when the valuation must be quick and inexpensive.

2. Asset-based valuation

This method is based on the financial figures of the business. They look at the book value and liquidation value of the business. Although this method will give a good insight into the business financial state, this method is almost never used as the sole path to determining an asking price.

3. Earnings-based valuation

This method also looks at the financial figures of the business. They look at the historical financial figures, cash flows (such as past, present and projected cash flow) and revenues of the business. In most cases this method is combined with asses-based valuation to get a more complete appraisal.

Things to Include in the Selling Memorandum

If you are planning to sell your business you need to present the most up-to-date information to prospective buyers. In most case this information is written in a so called selling memorandum. The following things you should be written down in a selling memorandum:

  • History of the business
  • The various products and/or services the business provides.
  • How well the business is known in the industry.
  • Who the competition is.
  • Operational procedures
  • Management
  • Employees (and job descriptions.)
  • Marketing Materials used in the past and already made for the future.
  • Financial forecast.
  • Things that you (as a seller) find important to pass on to the buyer.
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