The question of how to price your business for sale can be tricky. On the one hand, you want to be clear about your expectations for a sale and discourage lowball offers. On the other hand, you may risk leaving money on the table by naming your price. Both schools of thought seem reasonable. So how do you determine what’s best for you and your business?
In this article we’ll start by looking at the pros and cons of putting an asking price on a business for sale. We’ll discuss how to go about pricing your business for sale and also touch on some of the things that impact the final purchase price.
The topic of putting a price on your business comes with one big caveat: It’s not what you get, it’s what you keep. This is why deal structure and terms are often as important — or more important — than price.
With that said, let’s take a look at why and how to price your business for sale.
Should You Put a Price on Your Business?
If you want to start an argument in a room full of merger and acquisition (M&A) professionals, ask them whether or not you should put a price on a small business for sale. Many will say you should take a business to market without an asking price. While others caution against this strategy.
So, which approach is right for your business? As with all things M&A, the answer is “it depends.”
Most businesses for sale in the lower middle market (annual sales between $2M and $20M) tend to be listed with an asking price. Main Street businesses (annual sales <$2M) are always listed with an asking price. In general, the smaller the business the more likely it is that pricing the business for sale makes sense.
As businesses get bigger — and the buyer pool becomes larger and more sophisticated — it becomes more common for an auction process to be used. In a true auction process, the business is offered for sale without an asking price, and buyers are asked to bid in a tightly controlled process.
It may sound odd, but the question of whether or not to price your business for sale or use an auction process is largely determined by the potential buyer for your business. The reality is that most of the buyers for lower middle market businesses are either unwilling or unable to participate in a formal auction process. For that reason, you’ll have a much better chance of success by pricing your business for sale.
Advantages of Putting a Price on Your Business
There are a number of advantages to putting a price on a business for sale. A few of these include:
- It makes your purchase price expectations clear to buyers
- It helps weed out unserious and unqualified buyers
- It reduces time wasted on lowball offers
- It helps sell your business faster
One of the secrets to successfully selling (or buying) a business is transparency. Nobody likes to guess what the other person is thinking during a sale process. Stating your price upfront makes it clear that you have certain expectations that need to be met, price being one of them.
A potential downside of pricing your business for sale is that there might have been a buyer willing to pay more. This is why it’s important to get a business valuation and know the value of a business before going to market and talking to real-world buyers. Hoping there’s a buyer out there who will offer a premium is usually wishful thinking and comes with the risk of missed opportunities.
How to Determine an Asking Price for Your Business
Two things will go a long way towards determining an asking price for your business: A business valuation, and a good business broker or M&A advisor. The best M&A advisor will want to perform their own valuation on a business before agreeing to sell it. If an M&A advisor is doing your business valuation, make sure that the valuation is separate from the business broker’s listing agreement.
Ideally, the valuation process is a good way for you and the advisor to work together before embarking on the sale process. Selling a business can be an arduous and complex process, so strive for a good fit between you, your business, and the advisor. Going through a business valuation will also ensure that you and the advisor are on the same page regarding the anticipated market value of the business.
One of the most common business valuation methods — and starting point for determining a price — is to multiply pre-tax earnings by an appropriate multiplier.
Pre-Tax Earnings
A seasoned M&A advisor will be able to tell you how buyers will view pre-tax earnings for your type of business. There are a number of factors that determine the right earnings metric to be used in pricing a business for sale. Earnings metrics used include earnings before interest, taxes, depreciation, and amortization (EBITDA); EBIT; adjusted EBITDA; and Seller’s Discretionary Earnings.
The Earnings Multiple
Data from sales of comparable businesses will give you an idea of the small business valuation multiples associated with similar businesses that have sold in your industry. An experienced M&A advisor will have an idea of the range of multiples where they think purchase price offers for your business will likely fall.
With an appropriate range of multiples and earnings for your business, you can begin discussing an asking price. Using an example where the multiples range from 3.5 to 4.0 and pre-tax earnings are $1M, the asking price should fall somewhere between $3.5M and $4M.
You and your M&A advisor can discuss where on the range to set the asking price for your business. If your business has many qualities that justify a price at the high end of the range (more on that below), you may price the business close to $4M, or perhaps slightly above. If you need to sell the business quickly, or your business comes with more risk than peer companies, it may make more sense for the price to be closer to $3.5M, or less.
As you can see, there’s a lot of judgement involved in putting a price on a business. This is one of many reasons why selling your business without a business broker can make a difficult process even harder.
What’s Included in the Asking Price?
Buyers will want to know what is and is not included in the asking price for your business. And it’s in your best interest to be clear about this, as well. Everything is negotiable, of course, but the following is the norm.
Included in the Asking Price:
- All intangible assets
- All furniture, fixtures and equipment (FF&E)
- Some working capital (inventory & accounts receivable)
Not Included in the Asking Price:
- Cash and cash equivalents
- Debts and liabilities
- Excluded tangible assets
- Real estate
Quick Note on Real Estate:
If there is real estate involved in the sale of your business, that is usually priced separately. Business assets and real estate are two separate asset classes; they perform differently, are valued differently, and should not be lumped together into one purchase price. Some buyers will purchase the real estate along with the business, while others will not. You may want to retain the real estate and lease it back to the new business owner. Regardless, it is not customary for the asking price of a business to include the value of the real estate.
Be Prepared to Justify Your Asking Price
Buyers may or may not agree with your asking price. Regardless, they will all want to know how you arrived at a price for your business. Using the example above where a seller whose business has $1M in pre-tax earnings is asking $4M, buyers will want to know your reasoning for wanting four times earnings.
This is where you and your advisor will highlight the characteristics of your business that make it worth the price. Following are a few things that support a price at the high end of the range:
- Historic sales and profitability of the business
- Reliability of future sales and profitability
- Lack of significant customer concentration
- Lack of reliance on one or few suppliers
- Competitive advantage or niche market
- Desirable customer base or demographic
- Clean balance sheet with strong ratios
- Experienced senior management team in place
- Future opportunities for growth and expansion
- Healthy profit margins compared to industry average
- Comparable sales data from completed transactions
If your business is missing several of the characteristics listed above, it will appear riskier to buyers. This will make it harder to justify your business worth. Ideally, you’ll want to prepare your business for sale. During that time you can address and resolve issues that buyers could use to justify offering a lower price.
What’s More Important, Price or Terms?
While putting a price on your business is an important part of the process, there are a number of other factors that come into play. As we mentioned at the beginning of this article: It’s not what you get, it’s what you keep.
The terms of a deal can be just as important as the ultimate selling price. The amount of working capital included in the price can become an intense negotiation in and of itself. Deal structure, namely an asset versus stock purchase, can make a huge difference from a tax standpoint. Performance-based earnouts, seller notes, and employment agreements can all impact your net proceeds from a sale, as well as how long it takes to satisfy all obligations to the new owner and get paid.
8 Takeaways for How to Price Your Business for Sale
The question of how to price your business for sale is — like all things M&A — more complicated than it appears. There are many things to consider when estimating a sale price for your business, including the fact that price may be less important than other elements of a deal. Here are a few things to keep in mind:
- Pricing a business for sale is the norm for Main Street and lower middle market
- A business valuation is the starting point for determining price
- A lot of judgment goes into setting a price; hire an M&A advisor
- Use research from done deals to find an appropriate multiple range
- Understand how business buyers will view your pre-tax earnings
- Be clear on what the price does and does not include
- Work with your advisors to estimate net proceeds from a sale
- Deal structure and terms are just as important as price
At Allan Taylor & Company, we’re small business owners ourselves. Our advisors are ready to start the conversation about the value of your business, preparing for a business sale, and every aspect of the selling process. Feel free to reach out today.
Barbara Taylor is the co-founder of Allan Taylor & Co. You can follow her on LinkedIn.
