Pricing Your Business
The price you put on your business is vital. Experience shows that over-priced businesses do not sell. It is reasonable to try for the best price possible but an excessive asking figure will only put potential buyers off and eventually you must meet the market anyway.
The price paid for a business reflects its ability to generate profits. Other factors include location, competition, ease of financing, working hours and taxation considerations. As most businesses are assessed by comparison, what other vendors are asking and the actual recent sale prices of similar businesses, carry considerable weight.
Saleability can also be reflected in the price. For example, lower priced, easy to run businesses such as lunch bars sell at a high price relative to nett profit compared to say an engineering or joinery business requiring a high level of operator skills, specialised plant and huge stock levels. This is because there are more potential buyers for the easy to run "general purpose" businesses.
What are the components that make up the price? They comprise tangible assets such as plant, equipment and chattels. The quantity and worth of these assets can usually be readily determined. Intangible assets are the goodwill factor which is paid for the recurring profits in a business. Stock is usually purchased at cost or valuation, the amount of which varies considerably between various businesses.
Why is goodwill paid when a business is purchased? Purchasers have a choice. They can either start up a new business or buy a going concern. With an established business there are all the advantages of being able to walk in and "earn" from day one. With a new establishment, expenses are incurred and a long slog is usually the case before profitability is reached. Goodwill is the vendor's loss factor and effort in starting a business, which they seek to recover when the business is sold.
There is a qualification however. The business must be generating or have potential to generate profits and it must also reflect "current circumstances". If things are not going well it may well be better to price competitively, obtain a sale and move on, otherwise you may prolong the agony and end up worse off. What value do you put on peace of mind, a happy family and your health?
Financial over-commitment is one of the main reasons businesses come up for sale, however the business itself may be sound, given a proper financial structure. Therefore, separate debt servicing costs, owner's expenses and income from direct business income and expenses enable you, your financial advisors and business broker to apply "reasonable" debt loadings and owner's income in assessing profitability. This will assist pricing and the ultimate sale.
Changing market forces are another common reason for selling. New competition, changing consumer preferences, new locality factors and changing government policies can affect the viability of a business. In these circumstances vendors should acknowledge the changing situation rather than struggle on "as is" and continue to lose ground. Either change the nature of your business (further capital input) or accept that your premises can be better used by someone else and set a price that is economic for them to take you out.
Vendors can help themselves get a better price. Predispose of excessive stock, plant or chattels. Offer training, free of charge if necessary, especially if specialised skills are required. Vendor finance on attractive terms, especially where large amounts of stock are involved, will assist a sale.
There are many "rules of thumb" used to price businesses or assess the goodwill in a business. These are usually based on the weekly or annual turnover, net profit or super profit. Your accountant and a business broker experienced in selling businesses will assist you. However, in the end your price must be a market profit, taking into account market conditions and acknowledging that there are other businesses for sale competing with yours for buyers.
The business that offers the best all-round opportunity relative to price will sell first.