How is a Business Priced?
Many books have been written on pricing. It’s as much art as science. In the world of business brokerage, the intent and purpose of the pricing makes a difference. For instance, if a price is being prepared as part of a marketing plan, the intent and objectives of the price are part of an overall plan. If the price is being determined for an estate assessment, it may be more focused on the business as a collection of assets, and not as an ongoing concern. If selling to a larger company looking to expand by acquiring your business, you’ll want to understand the impact on their business, and how much would be relevant to their needs to arrive at a reasonable price.
For most main street business sellers, there is the focus on selling their business to another entrepreneur who will operate the business as an ongoing concern. There are ratios based on the cash generated by the business that vary by industry that allows one to arrive at a gross price. Even here, reviewing the cash flow and what is and is not part of the calculation is critical.
For more formal valuations for tax, estate, and other purposes, you may want to check our valuation section. To get your free valuation, click here.