Pricing A Business
Pricing a Business
When it comes to pricing a business to sell, there’s a common knowledge among business brokers. Basically, business owners usually believe their business should be priced higher than typical market price. Sometimes they’re correct in this assumption, but only in special cases. Sellers can be emotionally attached and therefore they tend to think they fall into the ‘special’ category, and sometimes they do. However, most businesses fall into standard market pricing, and if they really want to close a sale it’s probably a good idea to start out within market range, even if it’s on the high end of the range.
What is Market Range?
Market range is a price that is reasonable to both parties, given these criteria:
- Age of the business,
- Gross revenue,
- Gross & Net profit (EBITDA and Cashflow),
- Fixtures, furniture and equipment (FF&E),
- Prospective growth, and
Every business is different. Market price usually comes in around 2-3 times EBITDA, a.k.a. Earnings Before Interest, Taxes, Dividends and Amortization. However, if a business is experiencing extreme growth the figure may be determined by gross revenue, e.g., 2-3 times gross revenue, and it’s sometimes okay to start out at 3-4 times EBITDA (or gross revenue). On the other hand, if the business is slowing down the figure may start out at 1-2 times EBITDA.
Here’s a couple of examples:
- Kloudaroo™ created a website called IPO Docs™ and sold it in 2019. The website was roughly 6 months old and had nearly 40 clients. It had very little revenue, but a lot of prospective growth and goodwill. The website was marked at $35,000 and sold for $27,500.
- The Java Dive™ was a coffeeshop in Austin, Texas. It was priced at $150,000, which was 1-2 times the owner’s EBITDA. The owner was motivated to sell. It sold for $125,000.
Inventory and FF&E also play a role in larger businesses. Obviously, the cost of these items needs to be covered, or at least a portion of them. It’s acceptable to figure these items at a slightly higher price than wholesale, e.g., 5-10% higher, depending on the items. On the other hand, keep in mind that these prices need to be ‘reasonable.’ If the inventory and FF&E are badly worn or aged, obviously they need to be discounted appropriately.
Employees, especially ‘key employees,’ need to be considered as well. If the employees walk out after the sale the new owner will need to cover the cost of hiring new personnel and training them. This is also true to key clients and customers.
Cash in bank accounts is typically considered to be part of the business assets. Sellers should NOT ‘raid’ the company’s bank accounts prior to listing it for sale. The amount of cash in the bank can be configured into the sales price. Either way the seller will receive the money. If they raid the bank accounts it may lead to distrust in the seller and hinder the negotiation, not too mention it could cause a taxable event if the sale involves selling the actual legal entity.