How to Determine a Fair Price for Your Business

When you are considering selling your business, you will most likely have no idea how much you can get for it. After all, there are a ton of different factors that go into the final purchase price.

In order to get a good idea of what your business is worth, you will need to calculate your assets, compare it to other businesses that are on the market or that have sold recently, and put together financial statements that demonstrate to buyers the earning potential for your company.

To get a basic understanding of what you can ask for, follow the steps below. For a more in-depth analysis, contact us today.

1. Figure Out What Your Tangible Assets Are

When you sell your business, you aren’t just selling a concept. Most businesses also have physical office spaces that have furniture, fixtures, equipment, and inventory in them. You need to compile a list of all of these assets in order to create a realistic price for your business.

Once you have completed a list of your assets, you will have an idea of the price you could get if you chose liquidation over the sale of your business. Although liquidation may seem like an easier course of action, your business has the potential to bring in a lot more money if sold to the right buyer.

Selling your business also gives you the opportunity to continue to employ your staff and see the business grow after you retire.

2. Find Out What the Market Will Bear

In order to come up with an accurate estimate for your business’ purchase price, you need to look and see what recent listings and sales for other companies in your category, market, and size.

You should keep in mind that many of the prices you see are only asking prices. They do not reflect what the business will be sold for at the end of the process.

As a brokerage, Dolan Sales has access to a lot of information on recent sales in the area and we can paint you a fairly accurate picture of what your business is worth.

3. Take a Look at Your Financial Statements and Cash Flow

Before you can calculate an accurate estimate for your business, you need to sit down and look at all of your financial statements from the past three years. In order to ensure you have the right numbers and calculations, you should consult your accountant or bookkeeper.

You will need to prepare an income statement that displays your gross revenue and earnings for every year that your business has been open.

You will also need to prepare cash flow statements that display how much money your business received and paid out over the years. This statement will illustrate the impact of your spending on the assets of your business.

Finally, you will need to prepare a balance sheet that lists the tangible assets of your business and a discretionary earnings statement that demonstrates the expenses of your business. 

4. Prepare a Statement of Discretionary Earnings

Your statement of discretionary earnings is different from an income statement. It will reflect the full earning power of your business. It will be adjusted for a full range of normal deductions so that you can find out the lowest-possible bottom line for your business as well as its taxable profits.

Your statement of discretionary earnings will add back in non-recurring purchases as well as discretionary expenses that are not essential to your business operations but that were shown on your income statement.

Once your statement is complete, you will select an earnings multiple that is applicable to your business. Most businesses sell with a multiple of between one and four. This multiple is calculated by the attractiveness of your business.

For example, you gain points for the recent performance of your company, the ease of which it can transfer to a new owner, the size of your clientele, the financial records you compile, the exclusivity and uniqueness of your products, your recurring revenue streams, and your staff, location, brand recognition, and reputation in the marketplace.

Contact a Broker to Learn More

No matter how much time you spend compiling data on your business, it’s difficult to find out what the purchase price will be until you are in negotiations with a potential buyer. At Dolan Sales, we know how to vet potential buyers and help them prepare reasonable offers. We only bring our sellers offers from solid and reputable buyers and always maintain confidentiality. When you’re ready to take the sale of your business seriously, contact us.