If you are running a business and now thinking of selling it, then this is the first and most important question: “How to decide the correct price of your business?” This is a decision that not only reflects the current value of your business, but also decides whether your deal will be successful.
If you try to sell business at a very high price, potential buyers may find it expensive. On the other hand, if you keep the price very low, then you will not be able to get the right price for your years of hard work and investment.
Deciding the correct price of business is not only an accounting job, but many factor are associated with your market understanding, financial analysis, brand value of business and possibility of future growth. Many people make a mistake in this process as they only fix the price on the basis of profit or annual income, while it is necessary to keep more things in mind for a right valuation.
In this article we will understand in detail How to Price a Business for Sale ?. We will tell you step-by-step which methods can be adopted, what should be avoided and how the value of your business can be presented well in front of a potential buyer. If you are also preparing to sell your business at the right price, then this guide will prove to be very useful for you.
How to Price a Business for Sale ?
When you consider selling your business, the most important step is to decide its reasonable price. The price of business is not only based on its profits or annual income, but it also includes many other factors such as brand value, customer base, market status, future prospects, and assets. Correct pricing not only gives you a reasonable price for business, but it also wins the trust of potential buyers.
Customers can retreat if the price is high, and if low, you may suffer losses. Therefore, it is prudent to take help of an experienced business valuation expert or adopt reliable valuation method. In this article, we will know in detail how to decide the correct price of your business so that you can sell it successfully.
Calculate Your Business Price Using these Method
If you are thinking of selling online or offline business. then you must know about its price. and How to Price a Business for Sale ? it is very important for selling Your Online Business in Good Price. now we have give you detailed information on this topic. and Method of calculating business Value.
1. Asset-Based Valuation Method
Asset based valuation method is a method in which the actual price of a business and liabilites of a business is determined. The mainstay of this valuation is that if the business is closed today, then the owner will get how much amount will be received by selling all its properties and paying all the liabilities.
This method is particularly effective for business that have large and solid assets such as land, machinery, equipment, and inventory. This method usually used two types of asset values - book value (which is shown in the balance sheet) and liquidation value (if the price received if the properties are to be sold immediately). This method is suitable for manufacturing units, production business, and entertainment that run with heavy capital investment.
- Assets and liabilities are kept in mind
- Formula: Total Property – Total Liabilities = Net Value of Business
- Suitable for solid assets such as land, machinery, equipment business
- Both book value and liquidation value can be used
- The ideal way for manufacturing, production, and asset-hawi business
2. Income-Based Valuation
Income based valuation is a pricing method in which its value is fixed at the present time by reducing the future earnings of business, by reducing it with a fixed rate. This method moves to assume that the real strength of a business is hidden in its upcoming income. Therefore, it is estimated that how much business will earn in the coming years, and then how much that earnings should be considered today.
This method is more effective for business whose income is stable, whose customer base is strong, and whose growth is continuously increasing. It is especially used in service -based companies (eg IT, consultancy, digital marketing agencies, etc.) where physical assets are low but have consistent income. This method usually consists of two major sub-legislatures: discounted cash flow (DCF) and captivated income method, which are used based on business financial models and future prospects.
- Future income is converted into current value
- Suitable for stable and rising income business
- The ideal method for service-based companies
- Continuity of income and growth of business are preferred
Two major sub-legislatures –
- Discounted Cash Flow (DCF) method
- Capitalized Income Method
3. Market-Based Valuation
Market -based valuation is a way in which the price of a business is determined by looking at the value of the same type of business in the market. That is, if a competitive or similar scale business has been sold recently or is publicly listed, then the price of your business is fixed on the basis of its value. This method assumes that the market itself determines the correct value of business, so if the business with the same situation is sold at a certain price, then your business can also be almost the same value.
This method is especially suitable in areas where competition is high and many businesses or products provide. Two major analyzes are performed under this method: Comparable Company Analysis (CCA) in which the market value of similar companies is seen, and precedent transactions method, in which earlier business deals are analyzed. This method is practical and market-oriented and is attractive to investors.
- Pricing is done by looking at the market value of the same business
- Use of data of first sold or listed business in the market
- Suitable in competitive and scalable areas
- Realistic and trusted valuation method for investors
Two major sub-legislatures –
- Comparable Company Analysis (CCA)
- Precedent transactions method
4. Multiples Method
Multiples method is a simple and practical valuation method in which the price of business is fixed based on some major economic indicators, such as Ebitda (Earnings Before Interest, Taxes, Depreciation, and Amortization), Revenue or Net Profit. In this method, these figures are multiplied by multiples prevalent in the industry. For example, if the Ebitda of a business is ₹ 10 lakh and the industry is multiple 4, then the value of that business will be considered ₹ 40 lakh.
This method is fast and comparatively easy, especially when there are deals and figures available inside the industry that can be compared to multiple. This method is also attractive to investors and buyers who want to make quick decisions and follow the industry benchmark. However, its accuracy depends on how reliable and relevant the industry is.
- Value of Business = Economic data × Industry Multiple
Commonly used data –
- Ebitda
- Revenue
- Net Profit
- Fast and comparatively easy valuation method
- Use when the standard multiple is available
- Makes decisions easy for investors and buyers
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Remember these Factor in Selling Your Business
The value of business is not only based on income or property. There are also many other important factors, which affect the value of your business. Below are some major points which should be kept in mind during pricing –
- Annual Revenue & Profit: The total earnings of your business and the net profit you retain are very important. A business that generates higher profits is considered more valuable.
- Customer Base: Having loyal and regular customers enhances the credibility and market value of your business.
- Brand Value & Reputation: A strong brand name and good market reputation elevate a business’s value. If you have positive online ratings or people recognize your brand, it’s a significant advantage.
- Competition in the Market: If you have established a unique identity in a competitive market, buyers will consider your value to be higher.
- Future Growth Potential: Any buyer will pay attention to the potential for growth in your business. If the business is scalable, it may command a higher price.
- Technology & Systems Used: If your business operates with automated tools, a website, an app, or CRM software, it makes it even more attractive.
- Legal Compliance: The presence of all necessary legal documents, tax records, trade licenses, and so on instills confidence in buyers.
- Location & Setup: If the business is located in a prime area or is equipped with good facilities, its market value increases.
How to value a business based on revenue?
Income is an important factor when pricing business. In order to impose the price of business on the basis of income, first of all it is necessary to understand how much the annual income of business is. Next, you have to apply a multiple (multiple) on the income, which is usually based on the average of the industry. For example, if the annual income of a business is ₹ 50 lakh and the average multiple 2 in the industry, the estimated price of the business can be ₹ 1 crore.
While pricing on the basis of income, it is also necessary that not only the total income, but also the net profit should be taken into account. If your business is in good profit and is increasing continuously, then its multiple will be more, which will also increase its value.
This method is especially suitable for business that generate stable income, such as subscription models or service based business. However, it is important to note that only to decide the price from income is sometimes not correct, as it can ignore the total capacity of business and future growth possibilities.
Conclusion
How to Price a Business for Sale ? this is an important and complex process that is not solely based on numbers. You should carefully evaluate every aspect of your business, such as its financial situation, customer base, market position, and brand value. Setting the right price will not only ensure you receive a fair value but will also make it attractive to buyers and simplify the sales process.
It’s also important to remember that seeking help from a professional, such as a business valuation expert, is a wise step when determining your business’s price. This will help you understand the true value of your business and keep you competitive in the market.
Ultimately, proper pricing and considering all aspects throughout the process are crucial for your business’s success and for achieving a fair sale. This guide will assist you in simplifying the business valuation process.
FAQs
Should I be fully valued before selling business?
Yes, it is very important to get a complete valuation before selling business. This ensures that you are fixing the correct price of your business and you are not harming. For this you can consult a valuation expert.
How long does it take to decide the price of business?
The time limit in fixing the price of business depends on various factor, such as the complexity of business, valuation methods, and available data. Usually this process can range from a few weeks to a month.
Can some special steps be taken to increase the price of business?
Yes, you can take some steps to increase the price of business such as customer enhancing satisfaction, introducing new services or products, using digital marketing, and automating internal systems. All these aspects can positively affect the value of business.
Does financial figures only have importance while doing valuations?
No, not only the financial figures, but the brand value of business, customer base, future growth possibilities, and other elements are also important. A good valuation is done keeping in mind all aspects.
Does any type of tax or fee have to be paid after the sale of business?
Of course, you may have to pay tax on selling business, especially capital gains tax. Tax conditions depend on the type and location of your business, so you should consult a tax consultant.
