How To Value Your Business Right And Prepare A Strategic Future Exit

Incorrect valuation is the biggest problem in selling a business.  It stems from the biggest mistake, which is overcapitalization, which then leads to overpricing by the seller, which then turns buyers away until the seller is forced to sell it at a below-market price. So, when selling your enterprise –whether now or in the future– how do you value and price it properly?

It’s best to know the answers to this now if you plan on selling soon. It’s good to know this now, too, if you need to sell it later, so it can guide your current decisions and plans for a strategic exit strategy for the future.

The Stale Business Effect

On average, the process of selling a business takes around six to nine months or 200 working days. In the first three to nine weeks after you put it on sale, there is a high initial wave of prospective buyers, then it tapers off.

If you priced it way beyond the market price during this period, there is a 90% chance of your losing your buyers. So, you will keep dropping your price in the hopes of attracting a serious buyer. But, after nine to twelve months of doing this, even if you already offer at the current market price, buyers will see less value in your business. They will wonder: why has no one bought it after all this time?

So, you are forced to further lower your asking price even below the market price and end up selling it almost as a giveaway. This happens to eighty percent (80%) of enterprises who don’t know how to value and price their business right.

Pricing a business right involves assessing the convergence of the three main components of profits, market, and risk.

In general, Xcllusive Business Sales recommends an asking price of not more than 15% of the market price to sell at the best time, and not prolong the process needlessly. Selling at less than the market value is not selling at all.

How To Value Your Business Right And Prepare A Strategic Future Exit

Main Reasons For Overpricing

There are three common reasons for overpricing: the seller’s expectations based on their very personal investment in their enterprise, the seller’s not understanding market principles and buyers, and overcapitalization of the enterprise.

“Job Businesses” are Xcllusive Business Sales‘ largest type of sellers. They are small enterprises with annual profits of less than $300,000. They are run by their owners who essentially hired themselves for a job as manager of their own enterprise, where they earn at most fifty percent (50%) more than they would earn as a salaried employee elsewhere. It’s not a passive investment; they are very personally involved in running and growing their business.

When selling their businesses, they consider not only the financial investments they have made but also the personal investment of effort and sacrifices as well as years of their lives invested as a basis for their asking price, which may not be reflective of the value of their enterprise from a market standpoint.

The moment you open the doors of your business, the main driver of value is the profitability of your business, not the personal cost and investments you put into it.

From a business buyer’s standpoint, buyers decide to buy based on the synergistic value your enterprise affords them. This is based on the concept that the combined value and performance of two companies will be greater than the sum of the separate individual parts. So, a buyer will buy businesses to take advantage of economies of scale, new markets, new products, expanded market share, eliminating competition, and increasing prices. How are you, as a seller, offering these values to your potential buyers

From a market perspective, there is the concept of fair market value which is the price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm’s length. From either end, there is no pressure to buy or sell. When these conditions are met, a fair market price is achieved

Zoran Sarabaca, Xcllusive Business Sales principal, shares how people will often say that somebody will pay more for their business because it’s worth more to them. He corrects this impression by clarifying that actually, it is a very rare occurrence, and will probably occur only when someone approaches you to buy your business. In his more than 16 years in the industry, selling more than 200 businesses at high success rates, he estimates t