Difference between list price and sales price in a business sale
In business sales, it’s very commonplace to see that the business’ list price and sales price differ. This is due to a variety of factors such as the accuracy of the valuation, the competition for that business, cashflow, the return-on-investment on the sale, the financing, terms & conditions, parties’ negotiations, etc. Typically, the sales price will come within 5-10% of the list price.
What is the List Price In A Business Sale?
The list price is the price the seller is asking a buyer to pay for their business. This amount is derived from the business valuation which is based on a formula known as the Sellers Discretionary Earnings (SDE). The formula is based on the sellers’ last 3 years of tax returns and most recent profit and loss statements. The resulting cashflow amount is then multiplied by factors relevant to that business in that location. So if the business valuator determines that the cashflow is $100,000, and the relevant multiple is 2.5x cashflow, then the business will be listed for $250,000.
What is the Sales Price In A Business Sale?
The sales price is what the buyer actually paid for the business. The amount is typically less than the list price owing to negotiations between the parties, financing aspects and due diligence discoveries. On the other hand, the price can be higher if there is competition for the business who drive the sales price up in a bidding war.
The Difference Between List and Sales Price
There are numerous factors that that influence a business’s list prices. Apart from the SDE, financing is a very important factor. You can not sell a business if you can not finance it. If the lender thinks the business is overvalued, they will not provide a sufficient loan value which forces the buyer to generate. more capital for the purchase. That may kill the deal.
Getting an SBA loan requires thoroughly completing the application process and providing extensive documentation to justify the loan amount as part of the sales price. If the lender thinks the price is inflated, the lender will not provide sufficient funding.
Buyers may not be interested in your business if it’s overpriced. A thorough evaluation of your financial statements, industry-comparable sales figures, asset values, and ROI must be considered when determining the listing price. Remember that a business sale is only successful when both sides benefit. It’s also important to evaluate what is a realistic sales price for the assets of the business, the consistency of cashflow, the quality of the lease, the business location and the goodwill of the business,
You should also consider any trends in sales or profits that have occurred recently. Your company’s value could increase if your profits are trending upwards. It is important to know where your business is at each stage of its life cycle. If a company has been in existence for 20 years, and is worth $1.5million, it is likely to be worth more than a smaller business that has only been around one year.
Get An Accurate Business Valuation
On the other hand, listing your business for too low of a price could mean you are putting your money at risk. Your business valuation should include the following
- Tangible assets — Buyers look for a business with everything they need to run a successful operation. This includes equipment, location, inventory, and employees. The appeal to a buyer is the ability to start the business and make a profit from the first day.
- Financial statements — To accurately calculate the income-based value for your business, you will need all financial documents from the current year as well as those from the three previous years.
- Comparable businesses – Understanding the recent sales trends of comparable businesses will give you insight into the market.
Before You List Your Business For Sale
There are several crucial steps you need to take before selling your small business. It is crucial to know the market value of your business. A valuation will allow you to fully understand the financials of a business and the market value. It will also help you determine the right price for your business.
Imagine being able to identify what is most profitable for your business and what areas are leaking money. When you understand the details of your finances, it is possible to make efficient decisions that will make you more money over the long-term. What are some ways to increase the value of your company?
Experts will agree that predictability is the most important factor in making your company more valuable than its competitors. There are many other factors that can make your business more valuable than the competition, including recurring revenue, growth above industry average, location, diversity and organized financials.
This list contains both tangible and intangible assets. It is important to know. Profitable businesses are not just those that sell lots of products. Yes, this is important. But what keeps the lights on every week? Customers who return. A brand that is loved by customers returns time and again. What would they do to make them return? Unique, unique experiences. Your company’s value will increase if you are able to set it apart through your products and customer service.
Once you’re ready to sell, it’s time to organize your finances and do a business valuation. This will help you determine the sale price. Understanding the value of your business is key to ensuring that you negotiate with buyers who will not lower your price. You will find the right buyer who is willing to buy your business where you feel most at ease.
It can be challenging to determine a fair selling price. Sellers need to take into account the economic situation and any other factors, such as the strategic reasons for buying a company. It’s crucial to collaborate with experts like our business advisors to evaluate all options and determine the best price for your business. Get in touch with us today for your complimentary business valuation.