Pricing Your Company
Price is Derived at What the Buyer Will Pay
Understand that there is NO magic formula for setting price. Price is calculated with this one rule in mind:
Price is set at what the buyer will pay — it is not derived from any mathematical equation but rather as a psychological perception by the buyer.
If the buyer perceives that the value of business is great, they will pay a higher price. That is why you should target your selling strategy to those buyers who will perceive your offering at a greater value.
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Company Valuation Using Cash-Asset Position
Use this simple but non-substantiated business valuation formula to value and price your business:
Pricing Formula:
Take the value of your assets minus your account receivables (the value should be after you have recasted your financials)Formula:
Sum(1) = asset value - current acct receivablesAdd your net asset value to your 1-Yr. cash flow (use the most recent year's cash flow position)
Formula:
Sum(2) = Sum(1) + one year's cash flowNow take the cash flow and multiply it by 3
Formula:
Sum(3) = one year's cash flow x 3Add Sum(2) and Sum(3):
Formula:
Sum(4) = (net asset value + cash flow) + (cash flow x 3)Divide Sum(4) by 2
Add in the value of the accounts receivables
Formula:
Sum(5) = (Sum(4) / 2) + (Accounts Receivables)This will give you an approximate value of the business.
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Setting Price by Weighted-Cash Flow
This is a common practice used in the industry to get an estimated company valuation. It is based on the weighted cash flow position of the company over a 2-yr, 3-yr or 5-yr average.
You simply "weight" the current and prior's year cash flow position to derive the company's overall cash flow that is multiplied by an industry multiple to derive overall value.
Pricing Formula
Formula 2-Yr Avg:
Cash Flow = (2017 cash flow*2 + 2016 cash flow*1)/3Formula 3-Yr Avg:
Cash Flow = (2017 cash flow*3 + 2016 cash flow*2 + 2015 cash flow*1)/6Formula 5-Yr Avg:
Cash Flow = (2017 cash flow*5 + 2016 cash flow*4 + 2015 cash flow*3 + 2014 cash flow *2 + 2013 cash flow *1)/15Find the industry multiple
Formula:
the industry multiple is determined by similar companies that have sold or that are currently on the marketTake the cash flow average and multiply it by an industry multiple
Formula:
Sum(2) = weighted cash flow X industry multiple
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Setting Price by Your Marketing Strength
If your business has intrinsic value such as goodwill, established contractual relationships, prime location, or patented technology, you may set a value that equates the cost it would take for the buyer to replicate that value.
For example: if you have patented technology that would cost the buyer $YYY in development, the value of that technology would be priced at $YYY if the technology can be used in the going operations of the business.
If your business has contractual relationships that would take a buyer $ZZZ dollars to develop, the value of those relationships would be worth $ZZZ if those contracts can be transferred to the new buyer.
Setting these values can be tricky. We highly recommend that you use a professional valuation based on:
- Income Based Approach
measures the present worth of anticipated future net cash flows - Market Comparison Approach
compares recent transactions of similar businesses that have been sold
see what your company is worth: contact us for details on a valuation choice
business valuation services
Setting Price by Asset Holdings
Asset valuation is less complex than market valuation. You simply price the company based on the replacement or liquidation value of your company assets and equipment.
If you have specialized equipment that is not easily compared in value with other readily available equipment, you might consider a professional valuation based on:
- Asset Based Approach
considers the replacement cost as an indicator of value. This will substantiate the asking price for your asset holdings
see what your company is worth: contact us for details on a valuation choice
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CFOne Advisory Group 1-571-306-3590 (DC) 1-804-527-1103 (Richmond) or e-mail us at:
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Helpful Tools
Some helpful forms business owners:
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