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May 9, 2012

What's Your Right Asking Price

 
Step 4: Estimate the earnings multiple that's likely to apply when pricing your business.

Most small businesses sell based on an earnings multiple of 1-4. Translated, that means most owners receive somewhere between one and four times the annual SDE of their businesses, with the multiple pegged to the attractiveness of the business being purchased.

To begin to estimate where on the 1-4 range your business attractiveness is apt to fall, use the following chart:

ATTRIBUTE

Rate Your Business from 1 (lowest) to 4 (highest)

Recent Performance: Over past 2-3 years did your business revenues and profits increase steadily (highest), or were they flat (average) or declining (lowest)?

 

Ease of Transition: Does your business have policies, procedures, systems and staff that will make a new owner's transition very easy (highest) or difficult (lowest)?

 

Financial Records: Does your business have clean, complete, accurate financial statements that reflect all income (highest) or are your records informal and not inclusive of all your business revenue (lowest)?

 

Clientele: Do you have a broad base of profitable clients with no client representing more than 5% of your revenues, and do you have good customer lists and contracts (highest) or do a few customers account for most sales, without customer lists or strong, transferable contracts (lowest)?

 

Products: Does your business offer distinctly different, better, and difficult-to-copy products and services; does it serve an exclusive territory; does it offer an exclusive product line under transferable contracts or arrangements (highest) or does it offer products identical to those offered by other businesses in your market area with no distinct competitive advantage (lowest)?

 

Recurring Revenue: Does your business sell via subscriptions, monthly fees, automatic delivery programs or other approaches that deliver ongoing revenue from established customers (highest) or are most sales single-time transactions by one-time or occasional customers (lowest)?

 

Staffing: Does your business have key staff with transferable contracts who will assist with the business transition (highest) or are you the one-and-only key person (lowest)?

 

Location: If your business success is reliant on its location, is it located in a growing and desirable market area and in a location with a long-term, transferable lease and good facilities and equipment (highest) or will a new owner need to move or improve the location (lowest)?

 

Brand and Reputation: Does your business have a well-known name, respected reputation, and top-position within its competitive arena (highest) or are the reputations of competitors considered stronger and preferable (lowest)?

 

After completing this chart, you'll begin to understand the probable attractiveness of your business to buyers. If it is strong in areas of high importance to its current and future success, it's likely to command a higher-than-average earnings multiple. Conversely, if it's weak in key areas buyers will assess its worth at a lower-than-average multiple when arriving at a purchase price offer.

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Mike Handelsman is group general manager for BizBuySell.com and BizQuest.com, the Internet's largest and most heavily trafficked business-for-sale marketplaces. @BizBuySell