How to Set the Right Price for Your Business

By Joe Fournier

When considering whether to sell, share, or otherwise transfer all or a portion of your portion, it is essential to understand the right price. This is also called a “valuation”. A valuation that is too high may turn off potential buyers, investors, and partners, may lead to significant stress and tension, and may sometimes ruin not only the current transaction, but the overall relationship. A valuation that is too low is a mistake you and your family may regret for a long time.

This is not an exhaustive list, but here are four things you should consider when determining, and trying to maximize, the price of your business.

1. Maintain accurate financial data.

Make sure you have accurate historical financial statements, including at least an income statement (P&L) and a balance sheet. You should also have access to other financial data, including, for example, historical cash flows, a summary of key performance indicators, and an understanding of how your largest expenses relate to revenues. This information will provide you with the tools you need to determine excess cash flow and calculate an income- or revenue-based valuation.

2. Make sure you tell a story.

The ability to turn historically accurate financial data and operational improvements into a positive story is essential to setting and maximizing your asking price. This story may be customized depending on the audience. For example, a financially astute potential buyer may understand the numbers, and only want to see a trending analysis so they can draw their own conclusions, whereas a less astute buyer may have more questions about what the data means and why it is important to the future success of the entity.

3. Improve profit margins.

With some planning, you can implement improvements that will improve your business’ profit margins; improved margins will not only make you a more attractive target, but also improve your income- or revenue-based valuations. Improved workflow that improves net operating profit margins, cost-cutting in key areas in a manner that does not negatively impact operations, or improving top line revenues are all ways to make your business more attractive to investors.

4. Professional assistance.

Determining your business’ value and your asking price is usually a critical component to the sales process, and as such, business owners should at least consider enlisting the assistance of an objective voice that has experience in this arena. Some attorneys, accountants, business brokers, and other commercial valuation experts can help you ensure you get maximum value for your business without offending potential investors.

For assistance with your business valuation, or for any other law firm consulting needs, please contact Fournier Legal Services at jfournier@jeflegal.com or 860.670.3535 now for a free consultation and planning session.