Experienced sellers have known that the right asking price can generate interest from qualified buyers and, ultimately, help them reach a fair final sale price.
But setting the right asking price is easier said than done, especially because the business-for-sale marketplace is a dynamic exchange in which both asking prices and sale prices routinely fluctuate. In addition to understanding the process fundamentals for determining asking price, sellers also need to understand how to set an asking price that is aligned with current market conditions.
Price Dynamics in Q1 2014
A recent BizBuySell Insights Report showed that the median asking price for closed first-quarter transactions in the U.S. reported to BizBuySell.com was $199,000. These businesses reported median annual revenue of $400,000 and median cash flow of $96,000.
The median sale price for business transactions reported to BizBuySell in the first quarter was $175,000, for an average sale/ask ratio of 0.90. In other words, sellers in the current marketplace (on average) are receiving 90 percent of asking prices for their companies. When it comes to earnings multipliers, buyers paid 0.59 times annual revenue and 2.21 times cash flow.
It's important to note that sale/ask ratios weren't uniform across the board. Ratios were slightly higher for businesses in the manufacturing and service sectors, and slightly lower for companies in retail and other industries. They also vary by geography with certain markets seeing higher ratios.
How to Determine Your Asking Price
Overall, median revenue, cash flow and sale/asking prices have remained relatively stable over the past several quarters. This, combined with the strong sales activity in the business-for-sale marketplace seen for the past five quarters, indicates that sellers and buyers are successfully coming to mutually agreeable business valuation terms.
But that doesn't mean setting the right price to sell your business successfully is a slam dunk. When determining an asking price in today’s marketplace, there are several things you need to consider.
- Compile accurate financial statements. Before you can determine your asking price, you need to assemble an income statement, cash flow statement, and balance sheet. With these reports, you will have the tools you need to determine discretionary earnings and perform an income-based valuation.
- Determine and improve earnings multiples. Earnings multiples are a good way to get a ballpark estimate of an appropriate value range for your business. In most industries, business value typically varies from one to four times annual cash flow. However, earnings multiples can fluctuate based on earnings trends, geography, industry setting, and other factors. Various valuation tools can help you estimate a value range for your business quickly and cheaply. Perhaps most important, however, is that with advance planning and execution, it's possible to improve the earnings multiple to justify a higher asking and sale price.
- Professional assistance. The process of determining business value and asking price can be highly nuanced and is critical to the success of your sale. As such, most sellers should consider enlisting the assistance of a business broker or commercial appraiser to ensure that the asking price is aligned with actual business value and trends in the marketplace.
Not surprisingly, business sellers have a tendency to place a high value on their own business. However, you can't set the asking price based on personal feelings about your company’s worth. Instead, you need to be objective and establish an asking price that reflects the marketplace and generates interest from qualified buyers.