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 will be dependant on the buyers needs, strategy, and resources. That is why you should target your selling strategy to those buyers who will perceive your offering at a greater value.

Setting Price by Cash-Asset Position

If you are unwilling to pay for a Company Valuation at the current time, use our simple but non-substantiated free business valuation formula to price a business:

Pricing Formula
1.	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 receivables
2.	Add your asset value to your 1-Yr. cash flow (use the most recent year's cash flow position) Formula: Sum(2) = asset value + one year's cash flow
3.	Now take the cash flow and multiply it by 3 Formula: Sum(3) = one year's cash flow x 3
4.	Add Sum(2) and Sum(3): Formula: Sum(4) = (asset value + cash flow) + (cash flow x 3)
5.	Divide Sum(4) by 2
6.	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

Example:
Asset Value with the Accts. Receivables	$84,000
Accounts Receivables	$15,000
Cash Flow	$45,000
Step 1: Minus the accounts receivables from and asset value	$69,000
Step 2: Add the net asset value to the 1-Yr cash flow	$114,000
Step 3: Multiply cash flow by 3	$135,000
Step 4: Sum Steps 2+3	$249,000
Step 5: Divide Step 4 by 2	$124,500
Step 6: Add back in the accts. receivables to number in Step 5	$139,500
Approximate Value of the Company	$130,000-$150,000
Note: This is an approximate valuation based on asset value and cash flow position. A true value is derived by completing a professional valuation.

Another Example: Reverse the Cash Flow Value with the Asset Value
Asset Value:	$45,000
Accounts Receivables:	$15,000
Cash Flow:	$84,000
Step 1: Minus the accounts receivables from and asset value	$30,000
Step 2: Add the net asset value to the 1-Yr cash flow	$114,000
Step 3: Multiply cash flow by 3	$252,000
Step 4: Sum Steps 2+3	$366,000
Step 5: Divide Step 4 by 2	$183,000
Step 6: Add back in the accts. receivables to number in Step 5	$198,000
Approximate Value of the Company	$170,000-$230,000
Note in this example that CASH is a driving determinant of value. The higher the cash position, the greater your value Note: This is an approximate valuation based on asset value and cash flow position. A true value is derived by completing a professional valuation.

Building Up Your Cash Flow

Increasing cash flow requires an

1. the increase of sales and/or
2. a decrease of expenses

Maintaining a steady flow of sales requires a supporting marketing strategy.

You will find a complete module on building your sales using a Market Planning Model: click here

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 on-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:

1. Income Based Approach
   measures the present worth of anticipated future net cash flows
   
2. Market Comparison Approach
   compares recent transactions of similar businesses that have been sold
   
   more information about company valuations

Setting Price by Asset Holdings

Asset valuation is less complex than market valuation. You simply price the company based on the replacement 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:

1. Asset Based Approach
   considers the replacement cost as an indicator of value
   
   this will substantiate the asking price for your asset holdings — we have more information about company valuations

Setting Price By Company Valuation

The most accurate way to value a business and to substantiate your asking price is to complete a professional valuation. This is highly recommended if you intend to sale your business above book value.

Methodology to Valuation

The three generally accepted approaches used in determining the fair market value of a business is:

1. Asset Based Approach
   considers the replacement cost as an indicator of value
   
2. Income Based Approach
   measures the present worth of anticipated future net cash flows
   
3. Market Comparison Approach
   compares recent transactions of similar businesses that have been sold

The valuation may use one or more of the approaches above to determine value. It is completed by a professional appraiser using a database of similar valuations of like-businesses from around the country.

The process requires us to prepare the necessary documentation with a financial review of your financial records, operations, and marketing strategy. We will then forward that information to our internal valuation company. They in return will complete a valuation report within 5-7 days.

For more information, please call us:

1-804-527-1103

or click to our valuation page for more information

There are other reasons why you may complete an independent valuation of your business:

• for Lending Purposes: you may need a business loan or credit line. Many lenders will require an independent valuation of your business for lending approval
  
  
• for Getting Bigger: the valuation report can help you plan for a merger, acquisition, or stock offering
  
  
• for Employees: establishing and setting up employee stock ownership plans (ESOP) note: we have partners within our network that can help you establish ESOPs
  
  
• for Family Protection: provide information about your estate or ownership succession plan
  
  
• for Settlement Claims: determine asset/liability values for divorce or insurance settlements.
  
  
• for YOU: simply for wanting to know the worth of your company as you prep your business for an eventual sale