introduction
Pricing Your Company Correctly
The buyer's perceived "value" will determine the price. If the buyer thinks the price is too high in relation to the "value" delivered, they won't buy.
That is your challenge when setting the price for your business. The price that you get for your business will depend on how you market the business and to whom you market.
Page Topics:
valuation prep #1
Determining Value of a Business
To get the price that you expect, you need show 2 or more years of upward-trend that supports your market value. This includes:
It is critical that you follow these two rules when setting price:
valuation prep #2
you will need to open up the books
Value can mean different things to different people. The "price" to one buyer may signal low value in the benefits received; to another buyer, the "price" may indicate high value. That is why value can be a different measurement depending on to whom you market your business.
But there is one commonality that exists when measuring value: cash. A dollar-is-a-dollar-is-a-dollar. And the more dollars you have, the greater the value of your business.
So how should you measure a greater value
This is a given requirement before any business will sell at its maximum market value. If sales are trending down, it's best to revisit your marketing strategy or exit the business.
The buyer will analyze your sales numbers as follows:
Your company will have greater value when expenses incurred support the business operating and marketing strategy. Frivolous expenses or excess employees indicate sloppy management that can decrease the overall value of your business.
Prep your business by removing:
- expenses that are non-business related:
pay off company loans made for personal or non-business use- expenses that do not produce income:
analyze individual line items and pay-off or terminate service relationships for expenses that do not generate incomeAlso, prep your business by documenting:
- large expenses items that support the business operations or sales strategy
- expenses items that are part of your marketing strategy
valuation prep #3
buyers pay at their perceived value ... not yours
The value of a company can be perceived differently depending on the type of buyer. It is critical to market your business sale to the right buyer.
For example:
Pricing Formula: |
the price they will pay is the market value of your equipment and assets - which is generally priced at its replacement value |
use this pricing strategy when you want to exit the business |
target the sale of your business to the competition or other-like businesses in your area |
Pricing Formula: |
the perceived value is dependent on the macro-changes that are happening or expected to happen for that location |
the price they will pay depends on retail price of similar property in the surrounding area |
understand the potential use of your location. If your location is in a prime retail location for example, you may price your business and land at a premium |
you should get an independent land appraisal to substantiate your price |
Pricing Formula: |
the buyer's perceived value is dependent on the cost and time to establish a similar market or operation |
if the barriers of entry are high, meaning that the cost to setup and capture a similar market relationships are high, then your price could be somewhat high |
if the cost to setup a similar market is not high, then your price will be dependent on the buyer's perceived value of timing - how quickly they want to be in the market. |
understand the cost to setup a similar market. If that cost is high, then the perceived value may be high depending on your projected market position |
if the cost to establish a similar market is not high, then the perceived value is the strength of your documented cash flow position |
Pricing Formula: |
in most cases, the buyer would seek to license the technology and may not be interested in buying your operations |
the buyer's perceived value is the opportunity cost of not having the technology |
price the business and technology together with the technology piece the greater portion of the overall value |
the buyer may perceive the value as a great buy where they can take ownership of the technology and discontinue you as a potential hostage holder or competitor |
Pricing Formula: |
the perceived value is dependent on strength of the brand name and the current operations or product line |
the value will depend on the brand - which can be subject to different opinions - and the value of your assets and earnings |
if you are in a position of strength - meaning that your cash flow position and brand recognition are strong - you can bump the price up. |
Pricing Formula: |
the buyer's perceived value is the cost to finance the business, set an annual salary for the themselves or another business manager, and maintain required capital expenditures |
the higher your cash flow position, the greater your market value |
price will be based on your cash flow position which can be 2-3 times over cash flow |
navigate
Navigate Business Prep Module | |
business prep |
Supporting Files | |
marketing analysis | |
financial analysis | |
value analysis | |
business selling tips |
Site Files | |
home | |
business exit planning | |
business broker services | |
business valuations | |
business prep - analysis | |
business advisory services | |
tools |
end of topic
get a FREE consultation
Krayton M Davis Executive Director, CFOne Business Advisory Services Serving Richmond and Northern VA 1-571-306-3590 or e-mail your inquiry to: |
|