Top 3 methods of setting your asking price!
There is no one correct asking price but more a selling price range that you are likely to achieve.
Depending on how quickly you want to sell and how strongly your business is performing, the range can be quite wide.
Don’t worry too much about this because you will accept the offers that make sense to you and decline the offers that do not.
In the end, all offers are a good sign because offers lead to negotiation and negotiation leads to a sale.
If you are setting a price you need to choose a method that makes sense to potential buyers. Here are the three main methods we see most often used:
1. Return on Investment Value
This is where you calculate what the business is returning to the owner by adding back all the personal expenses and one off cost (addbacks) that are often included in the accounts to the profit figure to produce an adjusted net profit. You then multiply this figure typically by between 2 and 3 times. If you have at least 1 year’s profit and loss figures, and your adjusted net profit exceeds $30,000 this is usually your best option to price your business.
2. Establishment Value
This is setting an asking price based on the cost of opening the business in the first place. This works best if the business (and therefore the plant and equipment) are fairly new and you demonstrate the cost of setting up via invoices paid. If the business is say, a year old and not profitable yet, and you can show a fit out of $X then maybe this price minus a small discount is the best way to go. The buyer sees your business as an opportunity to jump straight into business, rather than set up their own.
3. Opportunity Value.
This is setting your asking price based on what you can demonstrate you think the business will earn in the next 12 months. If the business is likely to earn $X in the next year and you can demonstrate this by showing rapidly rising sales, or by offering the buyer a trial period to see for themselves how the business is performing, this could be the best option. If the future profit is credible, you can set the price as a multiple typically of 2 to 3 times this estimated figure.
Overall it is best to price your business competitively if you want a fast sale, but if speed of sale is not important, price higher up the scale and adjust the asking price downwards until you start receiving a good volume of enquiries.