Pricing Strategies

You have two basic options when pricing your business: advertise an asking price or don’t put a price on it at all.

Published Price

For smaller businesses it is almost always appropriate to advertise an asking price. The buyers of small businesses are typically not sophisticated enough to cope with developing a proposal without the starting point of an asking price. But what should that price be? You

What drives a company's value? How does it translate into the price you should put on your business? Should you put a price on it at all?

Cash is King

Different businesses have different things to offer a buyer. A buyer may be interested in specific industries, certain lifestyle requirements (e.g., no weekend hours), or like or dislike franchises. But all buyers have one thing in common: they want to know how much money they will make if they buy your business. Different buyers may have different return criteria or lifestyle needs, but, at the end of the day, the cash your business generates, or might generate, is going to be at the top of their list of concerns.

Valuations

There are many approaches to business valuation. The traditional approaches involve a (financial) mathematical approach to assessing the value of the cash flow your business generates. Factors like historical trends, future expectations, risk and opportunity costs are taken into account to apply "discount" or "capitalization" factors to assess the value today of your company’s future cash flow. Other approaches are less sophisticated, though often quite reliable, and apply a "multiple" to your cash flow. These multiples are often simple rules of thumbs that have evolved over time as the result of deal making experience in various industries. A simple percentage of annual sales (or multiple of sales in very rare cases) is also a common rule of thumb.

Some Common Rules of Thumb Liquor stores: 3 to 5 months sales plus inventory

Franchise Food: 45% to 50% of sales plus inventory

Distribution: 35% to 45% of revenue; this may or may not account for inventory

Manufacturing: 3 to 6 X EBITDA (Earnings Before Interest Taxes Depreciation and Amortization).

Pricing Strategies

You have two basic options when pricing your business: advertise an asking price or don’t put a price on it at all.

Published Price

For smaller businesses it is almost always appropriate to advertise an asking price. The buyers of small businesses are typically not sophisticated enough to cope with developing a proposal without the starting point of an asking price. But what should that price be? You c

they buy your business. Different buyers may have different return criteria or lifestyle needs, but, at the end of the day, the cash your business generates, or might generate, is going to be at the top of their list of concerns.

Valuations

There are many approaches to business valuation. The traditional approaches involve a (financial) mathematical approach to assessing the value of the cash flow your business generates. Factors like historical trends, future expectations, risk and opportunity costs are taken into account to apply "discount" or "capitalization" factors to assess the value today of your company’s future cash flow. Other approaches are less sophisticated, though often quite reliable, and apply a "multiple" to your cash flow. These multiples are often simple rules of thumbs that have evolved over time as the result of deal making experience in various industries. A simple percentage of annual sales (or multiple of sales in very rare cases) is also a common rule of thumb.

Some Common Rules of Thumb Liquor stores: 3 to 5 months sales plus inventory

Franchise Food: 45% to 50% of sales plus inventory

Distribution: 35% to 45% of revenue; this may or may not account for inventory

Manufacturing: 3 to 6 X EBITDA (Earnings Before Interest Taxes Depreciation and Amortization).

Pricing Strategies

You have two basic options when pricing your business: advertise an asking price or don’t put a price on it at all.

Published Price

For smaller businesses it is almost always appropriate to advertise an asking price. The buyers of small businesses are typically not sophisticated enough to cope with developing a proposal without the starting point of an asking price. But what should that price be? You

storical trends, future expectations, risk and opportunity costs are taken into account to apply "discount" or "capitalization" factors to assess the value today of your company’s future cash flow. Other approaches are less sophisticated, though often quite reliable, and apply a "multiple" to your cash flow. These multiples are often simple rules of thumbs that have evolved over time as the result of deal making experience in various industries. A simple percentage of annual sales (or multiple of sales in very rare cases) is also a common rule of thumb.

Some Common Rules of Thumb Liquor stores: 3 to 5 months sales plus inventory

Franchise Food: 45% to 50% of sales plus inventory

Distribution: 35% to 45% of revenue; this may or may not account for inventory

Manufacturing: 3 to 6 X EBITDA (Earnings Before Interest Taxes Depreciation and Amortization).

Pricing Strategies

You have two basic options when pricing your business: advertise an asking price or don’t put a price on it at all.

Published Price

For smaller businesses it is almost always appropriate to advertise an asking price. The buyers of small businesses are typically not sophisticated enough to cope with developing a proposal without the starting point of an asking price. But what should that price be? You

f annual sales (or multiple of sales in very rare cases) is also a common rule of thumb.

Some Common Rules of Thumb Liquor stores: 3 to 5 months sales plus inventory

Franchise Food: 45% to 50% of sales plus inventory

Distribution: 35% to 45% of revenue; this may or may not account for inventory

Manufacturing: 3 to 6 X EBITDA (Earnings Before Interest Taxes Depreciation and Amortization).

Pricing Strategies

You have two basic options when pricing your business: advertise an asking price or don’t put a price on it at all.

Published Price

For smaller businesses it is almost always appropriate to advertise an asking price. The buyers of small businesses are typically not sophisticated enough to cope with developing a proposal without the starting point of an asking price. But what should that price be? You

Pricing Strategies

You have two basic options when pricing your business: advertise an asking price or don’t put a price on it at all.

Published Price

For smaller businesses it is almost always appropriate to advertise an asking price. The buyers of small businesses are typically not sophisticated enough to cope with developing a proposal without the starting point of an asking price. But what should that price be? You can engage a business valuation expert or use one of the many excellent valuation services available on line. It is important to get an outside opinion to check your emotions and expectations. The most common error in the selling process is to overprice a business.

Un-Priced Strategy

For larger businesses, particularly those that are likely to have a competitor acquire them, an un-priced strategy may be appropriate. This is because your business will have very different value to an individual who buys it versus a competitor who buys it. The competitor may be able to consolidate locations and personnel, increasing the cash flow significantly over what an individual buyer would experience. More cash flow means more value. An un-priced strategy lets both types of buyers evaluate a price that works for them, and it may be a higher number than you expected! "Larger" can be as small as $500,000 - $1,000,000 in value. It depends on the business and industry and who are the likely buyers for your business.

Understanding the value of your business is the critical link in any sales process. An independent understanding of the value of your business will increase your ability to evaluate offers that are made. This makes you an informed decision maker and a better, more successful seller.