You buy products or services and one of the first thoughts you have is – How Much? You sell products or services to customers and one of the first thing a customer wants to know is- How Much? Somebody looks at buying a business and again needs to know – How Much? And a business owner is ready to sell his business and either move on to other business interest or retire and he needs to determine – How Much.
How does a business owner determine how much his business is worth? The reality of the matter is that the marketplace ,as with most business transactions, determine how much is the worth of the business. But in order to attempt to sell your business and market you business a value, or a price range needs to be determined to allow potential buyers the opportunity to see if your price goals match with the price range they are willing to pay.
When discussing the concept of valuing a business or setting a range and or target sell price of business with business owners some times the wrong criteria is initially considered by the business owner. Sometimes the “What I need to make when I sell my business” is different than “what the business is worth. Consider the example of a business owner invested $50,000 as an initial investment into his business and owes another $100,000 on some equipment he bought and is still paying off. I might ask the business owner if he has considered what he would want to sell his business for and he may say “I need to at least get $150,000 for the business because of the above reasons.” Actually the business owner is telling you what he believes he needs to get out of the business, yet this does not necessarily represent potential value to the buyer.
When business owners or entrepreneurs set prices for products and services certainly cost is a significant contributor to determining price point of that product or service. What like or similar products or services are selling for is also considered. But the successful and ongoing sales of that product or service is dependent upon how the customer values your product or service. Does your customer believe that they are getting fair value for the price of your product or service. The fact that you now lease a new expensive company car- does that enter into the pricing of your product or service. It may to you but very possibly/probably it does not to the customer.
This is a similar thought process that should go into the question of how much should I sell my business for. If a person can buy a similar business to yours and buy it for 40% less than yours why would they buy your business. The price/value needs to make sense. And if all else is similar it is reasonable to expect the potential buyer of your business to expect your business to be priced similar to other like businesses. And the fact that you invest more initially into your business or owe $x on the business, or lease an expensive new car really does not speak to value or pricing (unless liabilities are following the new buyer and may decrease the value to the new buyer)
The best scenario for selling your business is always a scenario which allows for you the business owner to plan that exit strategy. Part of that planning process is trying to determine what you believe you need to get out of the business for the sale to make sense to you (also allowing for tax consequences of such a sale.) But it is important that what you need to make when selling your business and what your business is worth when selling your business are 2 separate matters. While these are 2 separate matters that often get convoluted in the thought process of a business owner – it is very pragmatic to target a potential time to sell your business as a time when “what I need to get out of business when I sell my business” is at least equal or less than “the sell price or value of my business.” Ultimately the somewhat complex process of setting a price of a business for sale (or a product or service for sale) gets reduced to How Much are your selling your business for? and the answer being How Much are you willing to pay.