The importance of accurately pricing your business
As an Australian small business owner, you’re probably comfortable setting the prices in your business, but setting the price of your business is a whole new ball game.
Setting a fair price will help to attract serious buyers who are willing and able to buy your business, instead of just tyre kickers.
If you overprice your business, you will still attract interest from buyers, because it’s impossible to tell if a business is overpriced without access to the financials (which we recommend you keep confidential). But you’ll attract the wrong type of buyers who will complete the confidentiality process, review all your information, maybe even ask you some questions or have an inspection, and then, after having wasted your time, not proceed.
Overpricing your business will be interpreted by genuine buyers as a sign that you aren’t realistic, which hurts your credibility and will make the buyer less likely to trust you enough to buy your business.
In our experience, when a business is overpriced, serious buyers would prefer not to make an offer, rather than make an offer that could offend you. This is particularly true if you are selling your business yourself rather than engaging the services of a professional.
You can waste a lot of time trying to sell an overpriced business.
Then, if you have been unable to sell your business and you use the penetration pricing model and offer it at a lower price, this is interpreted by buyers as a sign you are desperate to sell, or the business performance is declining. Which generally results in you receiving less money for your business than you would have if you had priced it more accurately in the first place.
You’ll also need to continue running your business for longer, instead of moving on.
Ensuring that your business is priced accurately will maximise your chances of making a successful sale sooner.
If you choose to sell your own business, it’s up to you to find the sweet spot that fairly values your business to attract the right buyers and to drive transparency between potential buyers and yourself.
If you choose to partner with a professional, they will help you establish pricing strategies so you can accurately price your business based on their knowledge and experience.
In this article, we’ll explain the key factors to consider to accurately price your business and maximise its potential sale price.
Pricing for Negotiation
Setting the price for your business is more like setting the price for your house than setting the prices for your products or services. You have to take into account all your business costs without overlooking taxes, as well as other financials involved in your business. It’s best to start with an understanding of the market value of your business but the final price will be worked out in a negotiation between the buyer and seller.
Unlike houses, typically business prices are negotiated down not bid up. So, when setting a price for your business you should always leave some room for negotiation in the listing price, typically this means setting the price at the higher range of your business’s valuation.
Market Demand
You should consider the demand for your type of business when considering your pricing strategy. This is where market research comes in handy as customer demand varies over time and buyers are willing to pay more for a business in high demand.
For example, bookkeeping businesses are typically valued at about 1x revenue. However, recently the demand from buyers has been very high, knowing this, a business owner recently used the premium pricing strategy and priced their business at 1.28x and successfully sold their bookkeeping business via BusinessSales for the full asking price.
Market demand can change quickly and is influenced by a variety of factors like the size and growth of the market, the number of active sellers and buyers, and the overall economic climate. Another example of market demand influencing economy pricing was during COVID-19 when the prices of delivery companies and online stores skyrocketed.
Competitive Tension
If there are multiple potential buyers interested in purchasing your business, this can create competitive tension and result in a better price for your business.
This is because each buyer may be willing to offer a higher price in order to secure the deal. As noted above setting a fair price will help to attract genuine buyers who are willing and able to buy your business, which will result in a faster sale and better deal for you.
However, there is a limit here. More buyers mean you’ll need to answer more questions and give your confidential information to more people, which increases the risk of a confidentiality breach and the business costs of enforcing your rights if there is a breach.
We recommend you engage with no more than 5 high-quality buyers at a time. If you have more buyers sign confidentiality deeds for your business, we recommend you politely tell them the process is underway with other buyers and if the sale doesn’t complete, you’ll give them an opportunity to review the business at that time.
When selling your business it’s important to keep running your business to ensure sales and profits don’t fall. Falling sales or profits will scare buyers and often cause them to pull out of the deal which is why we recommend not working with more than 5 buyers so you’ve got time to continue to work on your business while the sale is progressing.
Financial Performance
Financial performance is typically the most important factor to consider when pricing your business, as most buyers will be primarily concerned with the return on their investment.
Potential buyers will want to see evidence of your business’s financial stability, typically this means financial statements and tax returns in some cases the buyer will request your BAS statements. In some industries (like hospitality) it’s common for a buyer to request your POS statements or Z reports.
By providing this information, you can demonstrate the value of your business and reduce the perceived risk for the buyer leading to an increased price. In addition to overall profitability, buyers may also be interested in specific financial metrics for your business vs the industry average. E.g., gross profit margin, net profit margin and annual revenue growth.
In general, the better your financial performance, and the more documented evidence you have of your financial performance the higher you can set the price for your business.
Location
Your location can also be a key factor to consider when pricing your business. If you have secured a strategic location that is difficult or impossible for others to replicate a competitor or strategic buyer may be willing to pay a higher price to obtain the location.
If your business is in a desirable area with a strong economy, you may be able to set a higher price because buyers may be willing to pay more for your business.
For example, a café located in a popular beachside tourist destination, or a capital city would typically obtain a higher price than the same café located in a remote town or less desirable area. This is partly because of the number of buyers as well.
This doesn’t just mean your physical location. Make sure you think about your digital location. For example, buyers may pay a higher price to get access to your website or social media accounts.
Other options
If you believe the main value of your business is not based on your financial statements, then setting a price at all can be detrimental. BusinessSales has two options for sellers in this situation.
Expressions of Interest – You can choose to list your business as seeking of “Expression of Interest” with an end date.
This allows buyers to contact you, submit an expression of interest to buy your business and determine a price during the negotiation.
“Open to offers” – This option is like “Expressions of Interest but does not have an end date for buyers.
The only downside when listing your business as “Expressions of Interest” or “Open to offers” the buyers will need access to your confidential information to determine if they can afford your business. So, this tends to take longer.
Price Vs Terms
This article is about pricing so we won’t discuss the sale terms here but it’s worth remembering that sometimes the terms of the sale can be more important than the final price.
In a recent example, a buyer offered an extra $50,000 for the business if the seller worked for the new owner for 6 months after the sale. Only you can decide if that’s a good deal for you.
Professional Help
Setting a price for your business isn’t as simple as it sounds but if you’re ready to make your next move, we’re here for you.
Whether you need some professional guidance to keep you on the right track, or one of our trusted professionals to take the reins – you can count on us to keep you and your business moving.
To discuss more about how to accurately price your business or to find a trusted licenced professional call us on 1300 77 NEXT (1300 776 398) or fill out the enquiry form below.
Thinking about selling your business?
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Anything worthwhile is!
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Are you wondering, “How do I sell my business?” If you don’t know where to start or how to move forward with the sales process – we’re here to help.
We can help you work out who and how to best sell your business whether that be selling your own business yourself or hiring a professional business broker.
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