Pricing a Business - How to Determine a Business's Selling Price
Both selling andpurchasing a business can be a very rewarding decision, when done properly.There are many different approaches tosuch tasks - however, their common issue is the difficulty with determining theright business selling price. Pricing a business is both a science and an art -and it takes skill and experience to do it correctly.
Pricing a Business
Whether you are a buyer or a seller of a businessestablishment, pricing a business is one of the initial tasks that await youafter you make a decision to buy or sell a business. It is also one of the mostdifficult tasks. There is not a single best method to price a business - in anycase, the final selling price still depends on how badly the seller wants tosell and how anxiously the buyer wants to buy the business. However, there arecommonly used methods to estimate the value of a business.
The first method is called market-based valuation.It is probably the simplest, in comparison to other approaches. Essentially,the business selling price should be similar to the price of similar businessesthat have previously sold in the area and industry. While this approach clearlydoes not take into account unique characteristics of a particular company, itoffers a "quick and dirty" method of pricing a business for sale.
Another method is asset-based valuation. This onebases its calculations on the book and liquidation values of a particularcompany. When determining a business for sale price, such values are usuallyconsidered to be the bare minimum, as other important features, for instance,brand name and customer base, are ignored.
The third and probably the most comprehensivebusiness pricing method is earnings-based valuation. Taking into accounthistorical, present and projected cash flows and revenues, this approachusually determines the business selling price most precisely, especially whencombined with the second method.
Business Selling Price
Despite the accuracy of the aforementionedmethods, the actual business selling price can fluctuate depending on a varietyof factors, not all of which can be easily quantified. Setting a price too highcan discourage buyers and even damage the reputation of the business if theoffer stays in the market for too long. Pricing a business for sale too lowcould mean a loss of a large amount of money.
The reason for such fluctuations in a business forsale price is in the so-called intangible value of a business. For instance, anentrepreneur may be selling a very well known and respected online company withvery few "hard assets". In this case, the neglect of the value ofintangible assets could drastically decrease the business selling price andwould be an inexcusable mistake on the entrepreneur's side. In some cases, thevalue of intangible assets can make up to 95% of the final price.
However, while assessing intangible assets isinherently difficult, one should be careful not to let emotions get in the wayof rational business decisions. For instance, while buying a popular bakery maybe an attractive idea, are you sure you are prepared to start your operationsat 3 a.m. in the morning?
The same warning is even more relevant to theseller who is pricing a business for sale. While it is natural to feel anemotional attachment to the company you own, do your best to manage youremotions when setting a business selling price. You need to avoid a significantover- or under-valuation of the company. With these points in mind, pricing abusiness no longer looks daunting or does it?