Coming to the asking price for your business is one of the most important decisions in the selling process. Your valuation may guide your asking price but there are many more variables to consider including market value, industry trends, marketing, and what financing your buyer has available. In this chapter we’ll go over important considerations and how Guidant Financial can help with this important step.
Six Considerations When Choosing an Asking Price
Picking an asking price should be done with as much thought and consideration as any other business decision. Though the initial price tag on your business can always be updated, it’s an important part of marketing your company to potential buyers. Too low and the business’s intrinsic value may suffer, too high and your pool of buyers grows small.
When pricing your business, keep these considerations in mind:
A business is only worth what buyers will pay for it.
Essentially, you can price your business anyway you see fit, but to sell it, the way you value the business has to align with how the buyer values it. For example, if you’re pricing your business based on the asset approach, but the potential buyer is focused on potential cash flow and prefers the DCF method, you may have very different prices in mind.
Appraisals and estimated business valuations are not asking prices.
It seems like with the investment that goes into acquiring either an appraisal or an estimated business valuation, you’d be left with a usable asking price, but that’s not necessary the case. What these resources do provide is valuable context for your asking price. As mentioned previously, you and the buyer may have different views on how the business should be valued, but you’ll have data and information to support your approach.
The selling price is typically lower than the asking price.
Unless the business you’re selling is part of an extremely hot market and you have multiple bidders, you likely won’t sell your business for the asking price — the sale price will be lower. To get a realistic gauge, you can review market comparisons of similar businesses that have recently sold.
The story you tell about your business will impact the sale price.
Just as when you were looking for initial business funding, you again need to be able to pitch your business when selling it. Consider what makes your business unique and how it will continue to be successful when talking to brokers and potential buyers. Better yet, if you believe there’s potential for growth in your company, have a quantitative story about how the next owner can expand. Your growth story should align with your asking price, especially if you’re using a value approach focused on future earnings.
Take industry trends into account.
It’s important to take into account how other companies in your industry are pricing the sale of your business because buyers will look to make comparisons. If your business has something to offer that you feel justifies a higher price tag, be sure to include that in your story and have proof about how it can affect future earnings.
Your asking price will affect the buyer’s financing options.
Though it’s not your responsibility to secure financing for a potential buyer, the price you choose does impact a buyer’s financing options. Here are some scenarios to consider that could impact buyer financing:
- SBA Qualifications. The SBA has a debt-service coverage ratio (DSCR) requirement. The DSCR is calculated by dividing annual net operating income by annual debt payments. Applicants seeking greater than $350,000 in funding must be buying a business with a DSCR of equal or greater than 1.15.
- Unsecured loans. Though unsecured loans are a popular option for hopeful small business buyers, the maximum funding is $150,000.
- Some funding options won’t be impacted. Financing options like rollovers for business startups (ROBS), portfolio loans, and HELOCs won’t be impacted by your business, only the applicant’s qualifications. We’ll cover these options in detail in Chapter 3.
We understand that with all the options available and variations to consider, valuing a business and picking an asking price can feel very overwhelming. For several years, Guidant Financial has helped business owners value their company as a part of our 401(k) plan administration services. We’re now expanding our business valuation services to include the Seller Suite — a comprehensive tool that provides information needed so you can determine a value and price the sale of your business.
What’s is Guidant’s Seller Suite?
Guidant’s Seller Suite is an estimated valuation, which makes it a great option for anyone wanting to sell his or her business. However, it does not meet appraisal requirements for those dealing with specific legal matters. Seller Suite provides six valuation approaches including Asset Approach, Discounted Cash Flow (DCF) Method, Capitalization of Earnings (COE) method, Market Approach, EBITDA approach, and a weighted average.
The Weighted Estimated Value takes into consideration all five valuation methods — balancing the elements of each to provide a weighted average of all the calculated business values. Anyone can use the weighted estimated value when comparing the values presented by the other methods.
What’s included in Guidant’s Seller Suite?
Seller Suite is a comprehensive guide for anyone looking to sell a business. It doesn’t just include detailed valuation information but also robust resources for both the seller and the potential buyer. Seller Suite has a flat one-time fee of $495 — here’s a look at what’s included:
- Seller’s estimated valuation: The comprehensive valuation provides all five valuation estimates as well as a weighted average. The weighted average is an extremely helpful number for sellers — making the most sense of all the valuations for your business.
- Seller financing assessment: An overview of the types of financing eligible buyers can utilize to financing the purchase of the business.
- Business flier: A specialty curated flier you can use to market the sale of your business.
- Buyer’s valuation: A buyer-facing assessment of the business’s value, including how detailed information regarding how the asking price was determined.
- Buyer’s financing assessment: A buyer-facing overview of potential financing options based on the asking price and additional qualifying factors.
Getting started with Seller Suite is fast and easy. It can help you pick an asking price and present your business to potential buyers. If you’re interested in learning more about Seller Suite, get started here.