How to Put a Price on My Business

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How to Put a Price on My Business: Understanding Proper Valuation

Introduction: Putting a price on your business is one of the most important steps when thinking about selling. You might have heard from a friend, competitor, or accountant that your business should be worth a lot.

But, it’s essential to understand how to determine that value accurately. In this blog post, we’ll explore what makes a business valuation ‘defendable’ and how to figure out the correct price for your business..

Understanding Business Valuation: Valuations are more than just numbers; they are defendable estimates of value. This means they should be based on solid data and methods that everyone agrees on. Here’s what you need to consider:

Beyond the ‘Rule of Thumb’: While rules of thumb, like industry multiples, can give you a quick estimate, they don’t go deep enough for a defendable valuation. Instead, it’s better to use more thorough approaches.

Key Valuation Metrics:

  • Sold Price to Gross Sales: This metric looks at the ratio of the sold price to the gross sales of similar businesses. It gives an idea of what businesses in your industry and size typically sell for.
  • Sold Price to Owner Benefit (SDE): Owner benefit, or Seller’s Discretionary Earnings (SDE), includes the business’s profit plus the owner’s salary and other perks. The ratio of sold price to SDE is crucial as it reflects the business’s profitability.

Calculating Owner Benefit:

  • Start with net profit.
  • Add back the owner’s salary, depreciation, amortization, and interest.
  • Include any discretionary expenses like personal car payments or non-essential travel.
  • Adjust for one-time expenses (like remodeling a showroom) and one-time income (such as PPP loans).

Factors Influencing Valuation:

  • Trend of Sales: Steady or increasing sales trends are more attractive to buyers and can command higher valuations. Buyers pay more for businesses with increasing profits.
  • Available Financing: The ease with which a buyer can finance the purchase impacts the valuation. Businesses that qualify for SBA loans often have higher valuations. You can also consider financing the sale yourself.
  • Key Business Ratios: Profit margins, debt-to-equity ratios, and other financial metrics provide insights into business health. How do you rank compared to the industry standard?
  • Marketplace Events: Economic conditions, industry trends, and other big-picture factors play a significant role in valuation.

Professional Valuation: If you haven’t had a valuation in the last two years, get one now. Hire a professional who not only provides a business valuation but also helps you identify factors that drive value in your company. This gives you incredible power because it allows you to see what changes you may want to make and where you’ll get the best return. It is also useful to get an updated, detailed, and defendable valuation report just before selling. Here are some common methods used:

  • Asset-Based Valuation: Considers the total value of a business’s assets.
  • Earnings-Based Valuation: Focuses on the business’s ability to generate future earnings.
  • Market-Based Valuation: Compares the business to similar companies that have recently sold.

Conclusion: Proper valuation is crucial for making informed decisions about selling your business. While multiples and rules of thumb offer a starting point, comprehensive valuation methods provide a more accurate and defendable estimate of your business’s worth. Consider consulting with a professional valuator to ensure your business is accurately priced in the marketplace.

Remember, our team of experienced professionals can provide a comprehensive and defendable valuation to help you achieve the best possible outcome. Be wary of the free online stuff. It can be good for initial insights but is generally insufficient to give the insight you need to get the best price for your business.

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Asking yourself “when should I sell my business?” 

Check our business valuation training organization: NACVA:

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