You may wonder, “How much is the business worth?”

The answer to this question largely depends on whether you’re a buyer or a seller. Each party will naturally favor the extreme end of the valuation range that supports their position—think of it as a financial tug-of-war, but with fewer mud pies. I’ll be honest – As a business broker paid through sales commissions, I aim to sell at the highest possible price. However, it’s crucial to ensure that the asking price is realistic and sellable. After all, a deal is only a deal if it closes.

You might ask, “So how do you determine the most probable selling price?”

Now this is a great question! The “most probable selling price” is typically determined using the Income Approach, particularly the Seller’s Discretionary Earnings (SDE) method. This approach focuses on the business’s earnings and is especially relevant for small businesses (Main Street Business) with revenues under $5 million. The formula is as follows:

Business Value = Seller’s Discretionary Earnings (SDE) × Business Multiplier

The business value will fall within a range, as the business multiplier can vary based on historical comparable transactions. The “most probable selling price” is influenced by various factors beyond standard norms, such as market trends, operational models, and the quality of financials.

If you’d like to learn more about how SDE is calculated, click here to check out this blog post—it’s more riveting than it sounds!

Here are some factors that affect the price, which are not often talked about:

• How badly do you want this transaction to happen? It’s not just about the money.

• • Seller Example: “I just inherited this business, have no interest in it, and can’t find anyone to help. I have a much higher-paying full-time job. Can someone just take it off my hands? I promise I won’t even look back!”
  • Buyer Example: “This business is strategic for my current project, and I need to integrate it into my existing company before my competitor makes a move.”

• How soon do you want this transaction to take place?

• • Seller Example: “Psychologically, this business stresses me out so much that I can’t stand it another day. Economically, the rental costs are causing negative cash flow, and I’m even willing to pay someone to take over today. Seriously, take it, please!”
  • Buyer Example: “This business would be a perfect addition to my company portfolio and would help me meet an important year-end revenue target I promised my investors. I’m confident we can improve its cash flow after integrating it into our ecosystem.”

• How operator-dependent is this business?

• • A business that is less operator-dependent often operates closer to a semi-absentee model, which is highly sought after—especially in the Bay Area. Many full-time tech workers have cash available and are looking to invest in cash-flowing businesses that require minimal attention. Such buyers usually have more negotiating power and can pay a premium. So, sellers, strive to build a company that’s not too dependent on you—unless you enjoy those late-night calls from buyers asking why the coffee machine isn’t working.

• How scalable is this business?

• • In my opinion, purchasing an existing business solely to maintain its current cash flow isn’t a viable strategy. If you’re not prepared to invest time in nurturing and growing the business, it might be better to work for someone else than to buy yourself a job—unless you really like the title of “Chief Sandwich Maker.” For those who agree, the ability to scale an existing business becomes a crucial factor affecting the selling price. Buyers who recognize the potential of a business and possess the experience and vision to elevate it will typically have more room to negotiate a premium price.

In conclusion, pricing a business is 50% science and 50% art. An effective broker’s role isn’t merely to list a business and find the highest-paying buyer; it’s about identifying the best match between buyer and seller, structuring a deal that is mutually beneficial, and ensuring the buyer has the best chance to succeed and grow the company. After all, nobody wants a deal that feels like a bad blind date!