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Both selling and purchasing a business can be a very rewarding decision, when done properly. There are many different approaches to such tasks – however, their common issue is the difficulty with determining the right business selling price. Pricing a business is both a science and an art – and it takes skill and experience to do it correctly.

Pricing a Business
Whether you are a buyer or a seller of a business establishment, pricing a business is one of the initial tasks that await you after you make a decision to buy or sell a business. It is also one of the most difficult tasks. There is not a single best method to price a business – in any case, the final selling price still depends on how badly the seller wants to sell and how anxiously the buyer wants to buy the business. However, there are commonly used methods to estimate the value of a business.

The first method is called market-based valuation. It is probably the simplest, in comparison to other approaches. Essentially, the business selling price should be similar to the price of similar businesses that have previously sold in the area and industry. While this approach clearly does not take into account unique characteristics of a particular company, it offers a “quick and dirty” method of pricing a business for sale.

Another method is asset-based valuation. This one bases its calculations on the book and liquidation values of a particular company. When determining a business for sale price, such values are usually considered to be the bare minimum, as other important features, for instance, brand name and customer base, are ignored.

The third and probably the most comprehensive business pricing method is earnings-based valuation. Taking into account historical, present and projected cash flows and revenues, this approach usually determines the business selling price most precisely, especially when combined with the second method.

Business Selling Price
Despite the accuracy of the aforementioned methods, the actual business selling price can fluctuate depending on a variety of factors, not all of which can be easily quantified. Setting a price too high can discourage buyers and even damage the reputation of the business if the offer stays in the market for too long. Pricing a business for sale too low could mean a loss of a large amount of money.

The reason for such fluctuations in a business for sale price is in the so-called intangible value of a business. For instance, an entrepreneur may be selling a very well known and respected online company with very few “hard assets”. In this case, the neglect of the value of intangible assets could drastically decrease the business selling price and would be an inexcusable mistake on the entrepreneur’s side. In some cases, the value of intangible assets can make up to 95% of the final price.

However, while assessing intangible assets is inherently difficult, one should be careful not to let emotions get in the way of rational business decisions. For instance, while buying a popular bakery may be an attractive idea, are you sure you are prepared to start your operations at 3 a.m. in the morning?

The same warning is even more relevant to the seller who is pricing a business for sale. While it is natural to feel an emotional attachment to the company you own, do your best to manage your emotions when setting a business selling price. You need to avoid a significant over- or under-valuation of the company. With these points in mind, pricing a business no longer looks daunting or does it?

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