Determining the correct valuation for your business is far from a simple task. Price it too low, and you risk not breaking even; price it too high, and you may deter potential buyers. So, how should you go about establishing the appropriate sale price for your business?

Successfully selling your company at the optimum price is arguably one of the key indicators of a successful business transfer.

To realize your plans post-transfer, whether that’s retirement, a career change, or a lifestyle shift, you need to garner sufficient funds from the sale. However, remember to factor in taxes and transaction costs.
To achieve this, you must understand the methodology for correctly pricing your business.

You could request a professional business valuation, but this won’t provide you with the selling price of your business.

In every operation we have conducted previously, we have always engaged in a discussion with our client regarding the sale price of the company after performing a financial analysis of the company.

So, why have a discussion after conducting a financial analysis?

A financial analysis provides the value of a company at a specific point in time, for example, on December 31st.

But if you’re seeking a buyer in 2023, it’s possible that circumstances have changed, and your company’s performance no longer aligns with the financial data from previous years that were used for the valuation calculations.

The value of your company may have increased or decreased.

Furthermore, a valuation is a relatively static financial approach that doesn’t consider the future strategies you’ve implemented. A buyer or investor is interested in the company’s future, not its past. It’s often a wager on the future that prompts a buyer’s proposal.

In the same vein, a valuation provides a minimum financial and accounting value of your SME.

Depending on your company’s growth potential or, conversely, its negative prospects, you’ll need to set a higher or lower selling price.

A valuation is thus an indicator of value but not the selling price, which must be determined using other methods.

So, in practical terms, how do you determine the selling price?

Contrary to some beliefs, the selling price of a company is not arbitrarily set by the buyer/investor (e.g., based on the financial capacity of potential buyers).
You should have a single asking price, even if a high-profile investment fund expresses interest.

Neither should you base the selling price of your business on the amount you invested into your business, or the years of hard work you put in.

You also shouldn’t price your business based on the selling price of another business that was sold some time ago in your sector. Even if the company sold had the same revenue, it likely did not have the same profitability, strategy, and growth potential.

Using the sale price of large, publicly-traded companies as a reference is also ill-advised. Buyers and banks will disregard such comparisons as they do not represent the same market.

You don’t determine the selling price of your business solely based on supply and demand. A scarcity of businesses for sale doesn’t mean you can set a high price for your business, and conversely, an abundance of businesses for sale doesn’t mean your business should be undervalued.

So, are there objective criteria or rational methods for determining the selling price of a business?

The answer is both yes and no.

From our experience, we’d like to share an important observation.

We’ve noticed that a company’s price fluctuates over time and does so non-linearly.

The price you set last year may no longer be applicable today or next year.

Unlike a product’s price, which typically follows a parabolic curve, peaking at maturity before declining, a company’s value curve is more volatile and less predictable, fluctuating in response to macroeconomic factors (economic conditions, regulatory changes, credit policies, public and large-scale corporate investment policies, etc.).

The value curve of a company also fluctuates based on microeconomic factors related to the company’s own operations and the efficacy of your implemented strategies.

Interestingly, we’ve found that it’s not macroeconomic factors that are most important, but rather the aspects intrinsic to the company itself.

While a company isn’t a product in the conventional sense, it shares some similarities…

And like any product, your company must continually innovate if you want its value to continue to grow.

Ideally, your company should enter the market at a favorable window of opportunity that aligns with your company’s growth curve.

This window of opportunity is ideal when your profitability has been on an upward trend for a few years and is projected to continue growing for several more, and when your products or services are yet to reach maturity or have only recently done so.

If you grasp this concept well, you will start on a strong footing, and even if you lack sales skills, you should be able to receive serious offers, as buyers/investors will be convinced of your company’s significant growth potential.

But there’s another crucial point you should understand: a buyer doesn’t purchase a company, and an investor doesn’t invest in a company based on its past, the time and money you have invested, nor its current results, but based on its future and its growth potential.

This potential is what justifies their willingness to pay a high price for your business and nothing else.

You can ask a professional to conduct a financial analysis of your company, but it will not provide you with the selling price of your business.

While conducting a financial analysis of your company is essential, it’s not enough.

Indeed, a financial analysis gives the value of a company at a specific moment in time, for example, on December 31st, the closing date of your company’s accounts.

It is a relatively static financial approach that does not account for your company’s performance over time or the strategy you’ve put in place for the future. A buyer or investor is interested in the future, not the past. It’s often a wager on the future that prompts a buyer’s proposal.

A valuation provides a minimum financial and accounting value of your SME and does not identify a positive, neutral, or negative trend in your company’s activity and results.

Depending on your company’s growth potential or, conversely, its negative prospects, you will need to set a selling price with a premium or a discount, respectively.

A valuation is therefore an indicator of value but is not the selling price, which you must determine by conducting a diagnosis of the strengths, weaknesses, opportunities, and threats that affect the company.

Only a thorough analysis of your company will allow you to justify a selling price higher than the appraised value of your company because it will highlight the performance indicators of your company.