If you’ve ever bought a house, you know that the appraised value isn’t what the house typically sells for in the end. It isn’t even what the sellers will use as the listing price in most cases. Most houses sell for a price that is less (or more) than what the seller asked for it. The same holds true for a business being sold.
Why aren’t the listing price and the selling price the same? What is the difference between the two? And how can that help you negotiate a better price for your business?
Listing Price Vs. Selling Price — What’s the difference?
Simply put, the listing price is the amount the seller is asking from a buyer to purchase their business. The selling price is the figure the buyer and seller agree on for the business.
The listing price for each business will be different, just as the selling price will also be unique. That is because a business’s value is based on several different factors, such as:
• Fair Market Value of tangible and intangible assets
• ROI (Return on investment)
• Market conditions
• The buyer’s ability to obtain financing
Another thing that may impact what you can ask for your business is any recent trends in your business’ sales and profits. If your profitability has been trending upwards, your company’s value may increase. Where your business is in its life cycle stage matters, too. For example, if a business has been around for 20 years and it’s profits are $500 thousand, it’s probably worth more than a business that’s been around for only one year, even if the newer business is just as profitable.
External factors may also come into play and impact your listing price. Again, this is very similar to housing prices when homeowners can list their homes for more simply because of market demand. If the market is hot, it allows them to potentially make a higher profit. Strategic buyers may be willing to pay more than others to take advantage of these economies of scale.
How do sellers determine their listing price?
Even if you are aware of all the factors that affect a business’ listing price, it doesn’t mean that determining an asking price still won’t be tricky. Should you err on the side of asking too much or not understanding the current market, you may attract much less interest from buyers, or the buyers who do express interest won’t be the right fit for the business.
However, listing your business for a price that’s too low could put you at risk of leaving money on the table. Transworld’s Business Valuation Calculator is the first step to help you determine the best price for your business, ensuring you are priced competitively, while also still maximizing your profit.
Your listing price must also take into consideration a thorough assessment of your financial statements, industry comparable sale figures, asset values and ROI. Remember, a business sale is a transaction that proves to be the most successful when both parties benefit.
When determining an objective listing price, many sellers put their trust in the expertise of a business broker like Transworld Business Advisors. If you’d like to prepare beforehand and have a better understanding of where your business’ listing price may land, here are some areas to research and assess on your own:
- The value of your tangible assets—Buyers often look for an ongoing business that has everything they need for a successful operation, from equipment to location, inventory (if applicable) to employees. For a buyer, the appeal of having a more turn-key operation is that they would be able to profitably run the business from day one.
- Your financial statements—To accurately estimate an income-based value of your business, you’ll need to gather all the business’s financial documents for the current year, as well as the previous three years.
- Research comparable businesses—An understanding of what comparable businesses (based both on size and industry) have been selling for in recent months will provide you with insight into what the current market will bear.
- Your willingness to help finance the purchase—many business owners who are willing to seller finance will see a higher price for their business, as the buyer will know that the seller is confident in the future of their business.
Arriving at an accurate selling price is rarely straightforward. In fact, the process can be complex, requiring you to consider the current state of the economy, your industry, and other factors such as a particular buyer’s own strategic reason for acquiring a company. All in all, it’s important to work alongside experts, like the business advisors at Transworld, to consider all available options and come up with the best asking price for your business. Contact us today to schedule your free consultation.
