When you purchase anything or hire someone, one of your first ideas is "How much?" When you offer items or services to clients, one of the first questions they ask is, "How much?" Someone is considering purchasing a firm and wants to know how much it will cost. And when a business owner is ready to sell his company and either pursue other business interests or retire, he must first calculate the price.
How can a business owner figure out how much his or her company is worth?
The truth is that, like with other commercial transactions, the marketplace determines how much a company is worth. However, in order to sell and promote your firm, you must first define a value, or a price range, that will enable prospective purchasers to assess whether your pricing objectives align with the price range they are ready to pay.
When discussing the notion of valuing a firm or defining a range and or target sale price with business owners, it's common for them to consider the incorrect factors at first. "What I need to earn when I sell my company" isn't always the same as "what the business is worth." Consider the case of a business owner who initially invested $50,000 in his company but now owes another $100,000 on equipment he purchased and is still paying off.
I may ask the business owner whether he's thought about how much he'd want to sell his company for, and he would respond, "I need to receive at least $150,000 for the company because of the aforementioned reasons." In reality, the business owner is telling you what he feels he needs to get out of the company, but this does not always reflect possible buyer value.
When company owners or entrepreneurs establish pricing for items and services, cost is undoubtedly a crucial factor in deciding the product or service's price point. It's also taken into account how many comparable or identical items or services are selling for. However, the success and continued sale of that product or service are contingent on the customer's perception of your product or service.
Do your customers think they're receiving good value for their money when they buy your product or service? Does the fact that you've just leased a new, pricey corporate automobile affect the price of your product or service? It may apply to you, but it most likely does not apply to the consumer.
A similar thinking process should be used to the issue of how much should I sell my company for. Why would someone purchase your firm if they can acquire a business that is comparable to yours for 40% less money? The price/value must be reasonable. And, if everything else is comparable, a prospective buyer of your firm should expect your business to be priced similarly to similar enterprises.
And the fact that you put more money into your firm at the start, borrow $x on it or lease a high-priced new automobile has nothing to do with value or pricing (unless liabilities are following the new buyer and may decrease the value to the new buyer)
What are your options for selling your company?
The optimum situation for selling your company is one that permits you, the business owner, to prepare your exit strategy ahead of time. Part of the planning phase is figuring out what you feel you need to get out of the company in order for the sale to make sense (also allowing for tax consequences of such a sale.) It's crucial to note, however, that what you need to earn when selling your company and what your firm is worth when selling your business are two very different things.
While these are two distinct issues that are frequently confused in a business owner's mind, it is very practical to target a potential time to sell your business when "what I need to get out of business when I sell my business" is at least equal to or less than "the selling price or value of my business." Finally, the complicated process of determining a price for a company for sale (or a product or service for sale) boils down to one question: How much are you selling your firm for? The question is, "How much are you willing to pay?"
Check Truforte Business Group for more details.