If you’ve ever bought a house, you know that the appraised value isn’t what the house typically sells for in the end. It isn’t even what the sellers will use as the listing price in most cases. Most houses sell for a price that is more (or less) than what the seller asked for it. The same holds true for a business being sold.
Why aren’t the listing price and the selling price the same? What is the difference between the two? And how can that help you negotiate a better price for your business?
Listing Price Vs. Selling Price — What’s the difference?
Simply put, the listing price is the amount the seller is asking from a buyer to purchase their business. The selling price is the figure the seller agrees to pay to buy the business.
The listing price for each business will be different, just as the selling price will also be unique. That is because a business’s value is based on several different factors, such as:
- Overall cost
- Market condition
- Financing ability
Another thing that may impact what you can ask for your business is any recent trends in your business’s sales and profits. If your profits have been trending upwards, your company’s value may increase. Where your business is in its life cycle stage matters, too. For example, if a business has been around for 20 years and it’s worth $1.5 million, it’s probably worth more than a business that’s been around for only one year, even if it is making the same amount.
But additional external factors may also come into play and impact your listing price. Again, this is very similar to housing prices when homeowners can list their homes for more simply because of market demand. If the market is hot, it allows them to potentially make a higher profit. Strategic buyers may be willing to pay more than others to take advantage of these economies of scale.
How do sellers determine their listing price?
However, even if you are aware of all the factors that affect a business’s listing price, it doesn’t mean that determining an asking price won’t still be tricky. Should you err on the side of asking too much or not understanding the current market, you may attract much less interest from buyers. Or, worse yet, you may appeal to the wrong kind of buyers.
But listing your business for a price that’s too low, could put you at risk of leaving money on the table. Transworld’s Business Valuation Calculator can help you determine the best price for your business, ensuring you are priced competitively, while also still maximizing your profit.
Your listing price must also take into consideration a thorough assessment of your financial statements, industry comparable sale figures, asset values and ROI. Remember, a business sale is a transaction that proves to be the most successful when both parties benefit.
When determining an objective listing price, many sellers put their trust in the expertise of a business broker like Transworld Business Advisors. But, if you’d like to prepare beforehand and have a better understanding of where your business’s listing price may land, here are some areas to research and assess on your own:
- The value of your tangible assets—Buyers often look for an ongoing business that has everything they need for a successful operation, from equipment to location, inventory (if applicable) to employees. For a buyer, the appeal is that they can be up and running the business from day one, making a profit.
- Your financial statements—To accurately estimate an income-based value of your business, you’ll need to gather all the business’s financial documents for the current year, as well as the previous three years.
- Research comparable businesses—An understanding of what comparable businesses have been selling for in recent months will provide you with insight into what the current market can bear.
Arriving at an accurate selling price is rarely a simple endeavor. In fact, it can be rather complex, requiring you to consider the current state of the economy and other factors such as a particular buyer’s own strategic reason for acquiring a company. All in all, it’s important to work alongside experts, like the business advisors at Transworld, to consider all available options and come up with the best asking price for your business. Contact us today to schedule your free consultation.