How do I set an asking price for my business?

There is no single formula that sets the right price, but there is a standard starting point that most buyers, brokers, and lenders will use to sanity-check whatever number you land on.

Start from earnings, not revenue

Most small business valuations start with seller’s discretionary earnings, which is pre-tax profit with the owner’s compensation and other add-backs put back in, because that is the cash flow a buyer is actually purchasing. Revenue alone tells a buyer little; two businesses with identical sales can be worth very different amounts depending on their margins.

Apply an industry-appropriate multiple

Buyers and brokers commonly price small businesses as a multiple of that earnings figure, and typical multiples vary a lot by industry, size, growth, and risk. A business with one large customer and an owner who does all the selling will command a lower multiple than one with a diversified customer base and a management team. Ask a broker or valuation professional what multiples are actually trading in your sector rather than relying on a general rule of thumb.

Adjust for what makes your business different

Growth trend, customer concentration, how dependent the business is on you personally, the strength of your lease, and the quality of your financial records all move the multiple up or down. A business that has cleaned up its books and reduced owner dependence before listing will generally support a stronger price than one that has not.

Check it against the market

Compare your number to what similar businesses in your industry and region are actually listed for, and be honest about how long those comparable listings have been sitting unsold. An asking price that is too high mainly results in a longer time on market and a lower final sale price. A professional valuation or a brokers opinion of value is worth the cost before you commit to a number.