Setting a business sales price is more art than science, though it is based in numbers. A handful of acceptable methods are used to determine a selling price for a business, and owners should calculate a potential selling price using more than one method to understand the range of possible sales values. Owners can then use their personal knowledge of the business and industry to arrive at a price that's reasonable for buyer and seller.
By making a few adjustments to your profit and loss statement, you can estimate the future cash flow of your business and derive an income-based selling price. Normalize the net income by adding back non-cash and unnecessary expenses, such as depreciation, charitable donations and excess meals and entertainment expenses. If the owner has taken a reduced salary, adjust salaries to the current market rate. To arrive at a valuation price, multiply the the normalized income by a discount rate that reflects any risk or uncertainty in business income.
If your business owns real estate or significant assets, you should incorporate the asset valuation approach into the selling price. Also known as the cost approach or balance sheet approach, the asset approach calculates selling price as the value of company assets. As with the income approach, start with the company balance sheet and make a few adjustments. Most assets are recorded at cost on the balance sheet, so adjust real estate and other assets to fair market value whenever feasible to get a more accurate figure.
Sometimes, the best and simplest way to calculate a reasonable selling price is to see what other buyers have paid for similar businesses. Procure industry data from financial information companies regarding business sales in your industry. Narrow the list to businesses that are similar to yours and have a similar level of sales. Calculate the average amount paid per dollar of net sales and apply the rate to your business.
Personalized Selling Price
After calculating a sales price under all three methods, choose a personalized figure that best reflects the business value. The income approach may generate the most realistic selling price if the main selling point of the business is a high profit margin. The asset approach may yield more appropriate results if the buyer is more interested in the fair market value of company assets. Use the market-based approach as a "reality check" to ensure your selling price is something that buyers will be willing to pay.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.