Congratulations on reaching your goals and having the taste of ecommerce success. If you have made it this far in scaling your trade, we appreciate your efforts and encourage you to lead others. Selling a business is a significant decision, and one of the most critical aspects is determining its fair market value. An accurate price ensures you receive adequate compensation for your efforts and investment while making it attractive to potential buyers. So here, we list the types, models, and calculation methods on how to price a business for sale.
Types of Valuation Models
Business valuation is part science and part art, and several models exist. Each has its strengths and weaknesses, and often, a combination of approaches gains a comprehensive understanding of a business’s worth.
Asset-Based Valuation
This model focuses on the tangible and intangible assets of the business.
Book Value
It is the net value of a company’s assets as they appear on its balance sheet (assets minus liabilities). However, it doesn’t reflect the true market value due to historical costs and doesn’t account for goodwill or future potential.
Liquidation Value
It represents the amount of cash that would be realized if all the business’s assets were sold off quickly and liabilities were paid. Typically, this one is a ‘worst-case scenario’ valuation, often used for distressed firms.
Replacement Cost
It estimates the cost of replacing all the business assets with new ones. This model is useful for businesses with significant tangible assets, but again, it may not capture the full value of a going concern.
Income-Based Valuation
These models focus on the earning power of the business, as buyers are primarily interested in future income streams.
Discounted Cash Flow (DCF)
It is widely considered one of the most robust valuation methods. It projects the future free cash flows and then discounting them back to their present value using a discount rate. The rate reflects the risk in those cash flows, and the sum of these present values gives the intrinsic value.
Capitalization of Earnings/Cash Flow
This method is simpler than DCF and is optimal for stable businesses with a consistent earnings history. It involves taking the average historical earnings or cash flow and dividing it by a capitalization rate (rate of return).
Seller’s Discretionary Earnings (SDE) Multiple
It is a common method for valuing small to medium-sized businesses. SDE represents the total financial benefit an owner-operator receives from the business before taxes and non-recurring expenses. Multiplying the SDE by an industry-specific factor drives you to a valuation.
Market-Based Valuation
It compares the setup to similar businesses that have recently been sold or calls for auctions.
Comparable Company Analysis (CCA) / Multiples Approach
It involves identifying recently sold businesses in the same industry with similar characteristics. Valuation multiples (e.g., price-to-earnings, enterprise value-to-EBITDA, price-to-revenue) from these transactions are applied to your financial metrics. The challenge lies in finding truly comparable businesses and adjusting for unique differences.
Highest Bids in Auctions
A rare fraction of businesses follow this auction procedure, where potential buyers are invited to bid on companies. More often than not, debtors facing liquidity crises call for it to make up for their losses. It is then sold to the highest bidder, along with all the assets and liabilities.
Steps to Calculate a Fair Price
Calculating a fair price involves several systematic steps, requiring thorough preparation and realistic assessments.
Gather and Organize Financial Records
You’ll need accurate and up-to-date financial statements for at least the past three to five years, including:
- Profit & Loss (P&L) Statements
- Balance Sheets
- Cash Flow Statements
- Tax Returns
- Lists of Assets and Liabilities
Adjust Financials for “Owner Perks” and Non-Recurring Items
Many privately held businesses have expenses that benefit the owner personally in personal travel, excessive salaries, and non-commercial entertainment. These need to be “normalized” or “recast” to show the true profitability without the owner’s discretionary spending. Removing one-time expenses or revenues, such as a large legal settlement or sale of an asset, reflects ongoing operational performance.
Determine Your Valuation Model
Based on the nature of your trade, its industry, and your financial data, select the most appropriate valuation models. For instance, a service firm with low tangible assets might choose income-based models, while a manufacturing company might consider asset-based approaches. It’s advisable to use at least two different methods to provide a range and cross-verify findings.
Project Future Performance (for Income-Based Models)
If using DCF or similar income-based models, you’ll need to develop realistic projections for future revenue, expenses, and cash flows. It requires careful analysis of market trends, competitive landscape, and unique growth opportunities. Be conservative and avoid overly optimistic forecasts.
Calculate Key Valuation Metrics
Apply the chosen valuation models using your adjusted financials and projections. For example:
- SDE: Calculate your Seller’s Discretionary Earnings.
- Discount Rate: Determine an appropriate discount rate for DCF, considering the risk of your trade and industry.
- Multiples: Identify relevant industry multiples from comparable sales data.
Analyze and Interpret the Results
Each valuation model will likely produce a different number or range. Don’t simply pick the highest. Analyze why each model yields its result. Consider the strengths and weaknesses of each method in the context of your specific niche. This step often involves qualitative factors that quantitative models can’t capture.
Consider Intangible Assets and Non-Financial Factors
Beyond the numbers, many factors influence the valuation:
- Brand Reputation and Customer Loyalty: A strong brand and loyal customer base can command a premium.
- Intellectual Property: Patents, trademarks, and proprietary technology add significant value.
- Management Team and Employee Skill Set: A strong, independent management team reduces reliance on the owner and adds value.
- Market Position and Competitive Advantage: A dominant market position or unique selling proposition is valuable.
- Diversity of Customer Base: Over-reliance on a few customers can be a risk.
- Systems and Processes: Well-documented and efficient systems make a business easier to transition and operate.
Consult with Professionals
Engaging with experienced business brokers, valuation experts, and accountants is highly recommended. They can provide an unbiased assessment, access to proprietary databases of comparable sales, and guide you through the intricacies.
Determine Your Asking Price and Negotiation Range
Based on your valuation analysis and professional advice, establish a realistic asking price. It’s also crucial to determine a negotiation range, understanding your minimum acceptable price and the justifications for it.
Platforms to Find Potential Buyers
Finding a buyer is a tough challenge, in the end, requiring skills and understanding. There is also a chance of post-selling dissonance regarding how to price a business for sale. Rather than referring to the offers that you get from acquaintances, research the following resources.
Online Business Marketplaces
These platforms connect sellers with potential buyers. They offer varying levels of service, from simple listing platforms to full-service brokerage.
General Business for Sale Marketplaces
- com: One of the largest and most well-known marketplaces for small to medium-sized businesses across various industries. It offers extensive exposure and tools for sellers.
- com: A global marketplace with a vast number of listings across many sectors and countries.
- com: Another established platform that offers listings for a wide range of niches.
- com: While primarily known for commercial real estate, it also lists businesses for sale, especially those with significant real estate components.
Specialized Online Business Marketplaces
- com: Ideal for selling websites, ecommerce stores, apps, domains, and other digital assets.It offers various listing options and support.
- Empire Flippers: A curated marketplace specializing in profitable online establishments like Amazon FBA, content sites, or SaaS.They are famous for their vetting process and full-service approach.
- com: Focuses on connecting founders with buyers for SaaS startups and other profitable online properties, with a strong emphasis on streamlining the sales process.
- QuietLight Brokerage / FE International / Website Closers: These are more full-service brokerages that specialize in online businesses, offering a more hands-on approach to valuation, marketing, and deal facilitation for higher-value digital assets.
- Investors Club: A platform that aims to provide a free listing option for online stores, with optional add-ons.
Business Brokers and M&A Advisors
- Local Business Brokers: These professionals specialize in selling businesses within a specific geographical area or industry. They have networks of prospects and can help with valuation, marketing, screening buyers, managing the negotiation, and due diligence.
- Mergers and Acquisitions (M&A) Advisors/Firms: For larger enterprises or sophisticated transactions, M&A advisors offer comprehensive services. It includes strategic planning, financial analysis, identifying strategic buyers, and navigating the complex legal and economic aspects of a sale.
Networking and Direct Outreach
- Industry Connections: Leverage your network within your industry. Competitors, suppliers, customers, or even former employees might propose interesting offers. Discretion is key here to avoid disrupting current operations.
- Professional Networks: Inform your accountant, lawyer, financial advisor, and other professional contacts about the sale. They often have clients or connections who are looking for investment opportunities.
- Chambers of Commerce and Trade Associations: These organizations can sometimes provide leads or resources for selling an enterprise.
- Strategic Buyers: Identify companies that would benefit strategically from acquiring your establishment by gaining market share, new technology, customer base, or synergy. Direct outreach to these companies, often through an M&A advisor, can lead to premium valuations.
Online Professional Platforms
- LinkedIn: While not a direct marketplace, LinkedIn is useful for discreet outreach. You can leverage your network to connect with potential buyers, investors, or M&A professionals. Posts in relevant industry groups can also generate interest.
Traditional Advertising
- Trade Publications: Advertising in industry-specific magazines or online journals can reach niche buyers.
- Local Newspapers/Business Journals: For very small local businesses, this might still be an option that is worth exploring.
Key Concerns When Choosing a Platform/Method
Before proceeding on any of these platforms, review the following considerations that will help you in making a decision.
Type of Business
Online stores typically do well on specialized digital asset marketplaces, while brick-and-mortar setups benefit from general business-for-sale sites and local brokers.
Size and Value of Business
Smaller businesses might use simpler listing services, while larger or more complex sales often require a full-service broker or advisor.
Confidentiality
If you want to keep the sale confidential, using a broker or an M&A advisor is crucial. They can screen buyers and use non-disclosure agreements (NDAs) for discretion.
Your Involvement
Some platforms offer ‘do-it-yourself’ options, while others provide extensive support. Determine how much time and effort you are willing to put into the sales process.
Fees and Commissions
Understand the cost structure of each platform or service, including conditional fees. Brokers typically charge a commission on the sale price, but you must confirm that.
How to Price a Business for Sale?
Ultimately, pricing a business for sale is a strategic blend, demanding a thorough understanding of your company’s intrinsic value, market dynamics, and potential. By organizing financial records, combining appropriate valuation models, and adjusting for owner-specific perks, you arrive at a justifiable valuation range. Remember that intangible assets and qualitative factors significantly influence the final appeal. While online platforms or professional advisors connect you with potential buyers, begin with a robust, data-driven, and professionally informed price. Ensure fair compensation for your hard-earned success and attract the right buyer. Best of luck with your future ventures, and keep building while educating others around you. WPKoders, the leading WordPress development company, is your reliable partner for ecommerce growth.
