Pricing a business for sale is one of the trickiest balancing acts an owner will ever face. Ask too much, and serious buyers vanish. Ask too little, and years of hard work get undersold. The biggest mistakes usually stem from misunderstanding how buyers think, over-relying on formulas, or ignoring the nuances of the business itself. We’ve talked with Christoffer Nielsen from Nielsen Valuation Group about how to avoid these pitfalls and how to arrive at a price that makes sense for both sides.
We’ll cover:
- See Your Business Through the Buyer’s Eyes
- Truly Understand Your Business
- Choosing the Right Valuation Approaches
- Beware of Cookie-Cutter Formulas
- Get the Numbers Right
See Your Business Through the Buyer’s Eyes
Most guides on valuing a business for sale jump straight into the calculations. But before we do that, it’s important to step back and understand a few key things first.
One of the biggest mistakes sellers make is mixing up what their business is worth right now with what they hope it will become in the future. Buyers are interested in the value they can see and measure today, not in dreams of expansion or growth that might happen later. Sellers, on the other hand, often want to be paid upfront for all that potential. That mismatch in expectations is where negotiations often stumble.
As a seller it might be tempting to highlight how revenues could triple with the right marketing plan or how margins might improve with more automation. But from a buyer’s perspective, that’s upside – the reward for taking on risk – not something they’ll pay for in advance.
This is especially true in startup-heavy sectors. Many entrepreneurs compare their small venture to giants like Uber or Tesla and argue, “We’re on the same path, so we deserve a similar valuation.” The problem is that investors know that only about 1 in 10 startups actually succeed long term. That reality tempers what investors and buyers willing to pay today.
Truly Understand Your Business
Numbers tell part of the story, but financial statements can be manipulated or distorted. A strong valuation digs deeper into the business itself: its leadership, its culture, its market positioning, and its potential risks.
Every buyer will ask questions like: How well will this business run once the current owner steps away? Are there reliable processes in place, and can they be maintained? What happens if key people leave? Is there room to scale and expand into new markets?
As a seller, you need to understand your business from this perspective in order to present an appealing offer. Strengthening areas like these not only makes your company more attractive but can also raise its price tag and improve your chances of closing the sale.
Obviously, not all businesses can be viewed through the same prism. For example, pricing a SaaS company is fundamentally different from valuing a chain of local restaurants. A software business depends heavily on recurring revenue, customer churn rates, and intellectual property. A restaurant chain may hinge on location quality, brand loyalty, and lease terms. Of course, pure real estate investments are a world of their own, requiring considerations beyond pricing a business for sale.
Choosing the Right Valuation Approaches
Once you understand how buyers think and have taken a sober look at your own business, it’s time to dig into the numbers.
How to price a business? No single method works for every company. Professionals usually consider three main approaches:
Market Approach
The market approach compares the business to similar companies that have recently sold. This can work well for small, local businesses (like coffee shops or supermarkets), but reliable sales data is often limited.
Example:
If you own a small café in Dallas, you might look at the recent sale prices of similar cafés in the area. If comparable businesses have sold for about 2.5 times their annual net income, that multiple can serve as a guideline for valuing your own café, with adjustments for differences like location, brand strength, or lease terms.
Income Approach
The income approach focuses on the company’s earnings or cash flow. Methods like Discounted Cash Flow (DCF) and Capitalization of Earnings are common. This approach is especially relevant for businesses with consistent revenue streams.
Example:
Take a professional services firm in Ausin that consistently generates $400,000 in annual earnings. If investors expect a 20% return to compensate for risk, you would divide $400,000 by 0.20, giving the business a value of about $2 million. This “capitalization of earnings” method works well for stable companies with predictable income.
Asset Approach
The asset approach calculates the value of assets minus liabilities, adjusted to fair market values. This is often used for asset-heavy businesses or in liquidation cases.
A credible valuation often blends these approaches. For instance, a manufacturing company might be valued using both income (to reflect profitability) and asset methods (to account for expensive machinery and property).
Example:
Imagine a small manufacturing company in Los Angeles that owns machinery, vehicles, and a warehouse. Using the asset approach, the valuation would be based on the fair market value of those assets minus any liabilities. If the equipment and property are worth $2 million but debts total $500,000, the business would be valued at around $1.5 million under this method.
Beware of Cookie-Cutter Formulas
Many so-called “valuation services” rely on pre-packaged formulas and multiples. They look precise, but the IRS itself warns against them. A one-size-fits-all calculation is more likely to mislead than help. A formula that simply multiplies last year’s earnings by an industry average ignores key realities, like irregular expenses, unique risks, or management changes.
Valuation requires human judgment, not just math. A professional evaluator will inspect operations, normalize financial statements, and consider context that a formula can’t capture.
Get the Numbers Right
Even the best methodology will collapse if the numbers aren’t accurate. Small businesses often show volatility in earnings. To correct this, it’s important to consider the big picture and to identify trends over time.
Also, financial statements must be normalized, removing one-time expenses, adjusting asset values, and making sure liabilities reflect reality.
In addition, various discounts may apply. For example for dependence on a single key person, or lack of marketability if shares are hard to sell. These adjustments make the final valuation more realistic.
At OfficeFinder, where expertise in office space and commercial real estate plays a central role, we know how critical proper valuation is. Even small details, such as a long-term lease with below-market rent, can dramatically impact what a business is truly worth. The importance valuations for commercial property has been covered on our site before, and the same principle applies here: getting the numbers right goes far beyond balancing the books. It means aligning them with real market conditions.
The Punchline
Selling a business is both an emotional and financial event. The temptation to price based on dreams, formulas, or superficial comparisons is strong, but dangerous. A credible valuation requires stepping into the buyer’s shoes, deeply understanding the business, using multiple approaches, and ensuring the numbers reflect reality.
Done right, a fair price builds trust, attracts serious buyers, and creates the foundation for a successful transaction. Done poorly, it risks leaving value on the table or scaring buyers away.
When the time comes to sell, remember: the price should tell the story of what the business is today, not what it might be tomorrow.
