A Guide for Determining a Reasonable Price for Your Small Business

There is a considerable difference between determining the value of a privately held company and a publicly held company. Topping the list of considerable differences is the fact that privately held companies do not have audited financial statements. Let’s look at how the owners of privately held companies should proceed in establishing a reasonable price for their company.

An audited financial statement is a costly endeavor and most small companies simply don’t have or need one.  Therefore, providing prospective buyers with as much verifiable information about your business as possible is one of the fastest and easiest ways to overcome buyers’ concerns.  A smart move for any business owner is to work closely with their accountant and/or business broker to go create an easy-to-understand presentation for prospective buyers. This should serve to allay many of their concerns. 

Working with your accountant is the first step in providing prospective buyers with the information they need to feel comfortable. The second step is to work with an outside appraiser or other expert who can determine the value of your business. After that, you’ll want to decide on what your market price will be, as well as your “wish price,” or the price that you would ideally want. Third, you must know your “rock bottom” lowest price. You, as the owner, need to have this information as it will greatly facilitate and streamline all negotiations. 

When buyers review materials and work to determine what price they are willing to pay, they will look at a wide range of factors including: 

  • Your income and earnings
  • The stability of those earnings 
  • The stability of the market 
  • Need for capital 
  • Product diversity 
  • The size of your customer base 
  • Potential competitors in the area 
  • Competitors on the horizon 
  • Potential disruptions to your business, such as supplier problems

Different buyers will place different levels of emphasis on certain areas, but you can be certain that the aforementioned areas will be examined with care.  The process is time consuming and sometimes rather complex.  Since sellers of most small businesses focus their time on running the business, the time commitment and complexity underscore the need for professional assistance.

Ultimately, the market determines the sale price of your business but a reasonable asking or listing price is important.  One of the first and most important steps is to work closely with professionals such as accountants, appraisers, business brokers and other advisors to establish the price of your privately held business. You can count on brokerage professionals to properly organize the facts and numbers that support that price.

Copyright: Business Brokerage Press, Inc. and NEBP.

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