January 23, 2025
How to Determine the Right Asking Price (and Defend It)
How to Determine the Right Asking Price (and Defend It)
For most small business owners, choosing the right asking price can feel like a high-stakes guessing game—one that might define your company’s future and your personal financial security. You probably already know that going too high could scare away prospective buyers, while setting your price too low risks leaving hard-earned money on the table. But the truth is, determining the ideal price point for your business—and standing firm behind it—doesn’t have to be a mystery. In this comprehensive guide, we’ll demystify how to calculate your targeted asking price and defend it with confidence when negotiating on the open market.
What You’ll Learn
In this article, you’ll discover:
Why asking prices matter more than you might realize for small business owners.
How understanding your true profitability (EBITDA or SDE) sets the foundation for a realistic price point.
The critical factors that drive a higher (or lower) market value in the eyes of prospective buyers.
Proven strategies for defending your asking price, including negotiation tactics and data-backed discussions.
How to handle (and overcome) common objections from buyers who push back on your initial pricing.
By investing a few minutes to understand these key concepts, you’ll walk away prepared to set an asking price that accurately reflects your business value and to confidently articulate why that price is justified.
Why Your Asking Price Matters
Your asking price serves as more than just a number on a listing—it’s a strategic decision with real-world consequences:
It signals the value and stability of your business to prospective buyers.
It influences the types of inquiries and offers you receive.
It sets the baseline from which all future negotiations will proceed.
Small business owners who undervalue their companies may attract a flurry of lowball offers that leave substantial money on the table. Conversely, those who overshoot risk alienating qualified buyers, extending time to close, and accumulating additional holding costs. Getting this number right—at least within a defensible range—lends credibility to your sale and positions you to negotiate successfully.
Establishing a Solid Asking Price
Securing a compelling asking price starts with facts and data rather than guesswork. Prospective buyers, whether they’re individual entrepreneurs or larger companies, typically evaluate a business through two core lenses:
Profitability
Risk
If you can show strong profitability and mitigate perceived risks, you’ll command a higher multiple of earnings. Below, we’ll walk through exactly how to measure these earnings (EBITDA or SDE) and identify the primary factors that can raise—or lower—your final market value.
Understanding Business Profitability
When it comes to determining asking prices, profitability is king. Buyers want to know how much cash the business is generating on a steady basis. This helps them assess potential returns on their investment. Two common measures of profitability come into play:
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
SDE (Seller’s Discretionary Earnings)
EBITDA for Mid-Sized and Larger Businesses
EBITDA is typically the go-to metric for businesses generating more than $5 million in annual revenue. By stripping out interest, taxes, depreciation, and amortization, EBITDA pinpoints how well your operations perform on a cash-flow basis. It’s a standardized metric that prospective buyers across industries understand intuitively.
Example EBITDA Calculation:
Income Statement Item | Amount | Explanation | |||
|---|---|---|---|---|---|
Net Income | $300,000 | ||||
+ Interest | $25,000 | Financing decisions vary by owner | |||
+ Taxes | $100,000 | Tax rates differ based on structure | |||
+ Depreciation | $60,000 | Non-cash expense for equipment | |||
+ Amortization | $15,000 | Non-cash expense for intangible assets | |||
EBITDA | $500,000 | Actual operating performance |
If you only focus on net income ($300,000 in this example), you risk undervaluing your business. A properly calculated EBITDA of $500,000 might command a significantly higher asking price once coupled with a market-driven multiple.
SDE for Smaller Businesses
For businesses with under $5 million in annual sales (often owner-operated), SDE is more relevant. SDE starts with EBITDA, then adjusts for the owner’s salary and any personal or non-operational expenses that might obscure the true earnings power. Common add-backs include:
Owner’s salary if it’s above or below market rate
Personal vehicle and travel expenses
Family member payroll that isn’t crucial to operations
One-time or extraordinary costs (e.g., legal fees from a lawsuit)
Example SDE Calculation:
Calculation Step | Amount | Comments | |||
|---|---|---|---|---|---|
EBITDA | $150,000 | From your adjusted financials | |||
+ Owner’s Salary | $60,000 | Owner pays themselves below-market wages | |||
+ Personal Vehicle Expense | $10,000 | Vehicle is primarily for personal use | |||
+ Family Health Insurance | $8,000 | Included as a business expense | |||
- Market Salary for CEO | -$35,000 | Subtract if you’d need a replacement CEO | |||
SDE | $193,000 | True normalized earnings |
By clarifying the true profit potential, SDE offers prospective buyers a transparent view of the business’s cash flow. The result is a more accurate basis for your asking price.
Key Valuation Drivers Beyond Profitability
Even with strong EBITDA or SDE, you’ll need to consider additional factors that can significantly affect your asking price. Think of the ultimate value as:
The valuation multiple often hinges on how risky or stable buyers perceive your business to be. Factors that influence the multiplier include:
Driver | Impact on Valuation Multiple | ||
|---|---|---|---|
Revenue Stability | Consistent or contracting revenue clarifies your risk profile. Steady or growing revenue usually justifies a higher multiple. | ||
Customer Diversification | A broad customer base reduces reliance on a handful of large accounts, boosting the perceived reliability of cash flow. | ||
Industry Trends | Rapidly growing sectors see higher multiples. Declining or saturated markets see reduced buyer enthusiasm. | ||
Operational Dependence | If you (the owner) handle every major function, buyers might foresee a difficult transition. | ||
Brand Reputation | A well-known and respected brand often commands a premium. | ||
Systems & Processes | Well-documented processes and clean financials reduce uncertainty and appeal to risk-averse buyers. |
When strategically defending your asking price, reference these points to show that your profitability isn’t just a number in isolation—it’s part of a business with strong fundamentals.
How to Justify and Defend Your Asking Price
Once you establish a realistic figure based on your adjusted profits and industry-appropriate multiples, the next step is to confidently defend that number. Buyers frequently attempt to negotiate downward, citing “market conditions” or “ownership transition risks.” Overcoming these objections requires preparation, data, and a clear articulation of your business’s strengths.
Addressing Buyer Pushback
Buyers often come to the table with questions or concerns:
“Your asking price is higher than another similar business.”
“I’m worried about retaining key customers after you leave.”
“The overall economy is unpredictable right now.”
To combat these objections, focus on objective data and evidence-based explanations:
Show year-over-year revenue trends that demonstrate stability or recent growth.
Present customer contracts or retention metrics that minimize transition fears.
Highlight the resilience of your business model, even under economic pressure.
Emphasize intangible assets such as your brand reputation, intellectual property, or loyal customer community.
Rather than engaging in back-and-forth haggling, ground your defense in facts. Explain why your price is fair relative to cash flow, market benchmarks, and the key risk factors you’ve already mitigated.
Data-Driven Negotiations
The best negotiations are built on information—information that validates your asking price and signals the seriousness of your offer. Consider preparing the following documents and data points:
Multi-year financial statements (current and at least two previous years).
Normalized profit calculations (EBITDA or SDE) with thorough documentation of adjustments.
Details on recurring revenue streams or long-term client contracts.
Industry benchmark comparisons for valuation multiples.
Testimonials or endorsements from satisfied customers to reinforce brand value.
Well-presented data flips the conversation from subjective debate (“I think your price is too high”) to a more quantitative assessment (“Let’s look at the metrics that justify this price”).
Real-World Example: Defending an Asking Price
Imagine you own a small manufacturing company specializing in custom metal parts for a range of industrial customers. You’re asking $2 million based on your adjusted EBITDA of $400,000 multiplied by a 5× multiple. Potential buyers might question why you deserve a 5× multiple when they’ve seen similar businesses sell for 4×. Here’s how that conversation could unfold:
Buyer Concern | Your Response | ||
|---|---|---|---|
“Why 5× and not 4×?” | “Our products serve diverse sectors—construction, automotive, and even medical devices—protecting us if one sector slows down. That diversification reduces risk and justifies a higher multiple.” | ||
“I see one large client representing 30% of revenue.” | “Yes, but we’ve secured a 3-year supply contract with them, and they’ve been a client for over a decade. They’ve already indicated willingness to renew.” | ||
“Manufacturing can be capital intensive.” | “True. However, we’ve recently updated our equipment, resulting in minimal near-term capital expenditures for a new owner.” | ||
“I’m worried about labor shortages or skill gaps.” | “We have comprehensive training programs for new hires and a stable workforce with a low turnover rate. Our processes are well documented, ensuring smooth onboarding.” |
By referencing diversification, contractual client relationships, up-to-date equipment, and streamlined labor practices, you articulate clear, data-backed reasons to support your 5× valuation multiple. Buyers are far more likely to accept a price premium when they see tangible evidence that mitigates their biggest concerns.
Conclusion: Strengthening Your Position for a Successful Sale
Determining and defending your asking price is one of the most pivotal decisions you’ll make as a small business owner. Rather than guessing or simply copying what you see in loosely comparable listings, ground your price in the core fundamentals of profitability and risk management. Show prospective buyers that your business isn’t just turning a profit—it’s built on stable foundations that translate into future gains for them.
Summary
A strong asking price starts with accurately measured EBITDA or SDE, ensuring you showcase real profit potential.
Company-specific valuation drivers—like revenue diversification, customer contracts, brand identity, and efficient operations—can raise the multiple you apply to those profits.
Defending your asking price means addressing buyer objections head-on with verifiable data and logical arguments, rather than simply holding fast to a number.
Bringing clarity and consistency to your explanation builds trust, which can speed up closing times and help you secure top dollar for your life’s work.
Next Steps
If you’re serious about selling your business or even just exploring your exit strategy, here are some immediate actions to consider:
Consult with a CPA or accountant to ensure you have clean, well-documented financials.
Perform an internal audit to identify and isolate any expenses that aren’t critical to day-to-day operations (owner perks, one-time charges).
Engage a professional M&A advisor or business broker who understands your industry’s valuation norms and can pull data on similar businesses.
Prepare customer or supplier contracts, business process documentation, and any other proof points the buyer will want to see.
If you’d like personalized guidance, OffDeal M&A is here to help. Schedule a free, confidential consultation with one of our advisors to:
Calculate your business’s true profitability, including EBITDA or SDE adjustments.
Compare your enterprise to similar businesses that have recently sold.
Craft a data-driven defense of your target asking price.
Navigate typical buyer objections so you can close deals faster and with less stress.
Schedule a call with an OffDeal M&A Expert today.
Disclaimer: This content is for informational purposes only and does not constitute legal, financial, or investment advice. Always consult qualified professionals regarding your specific situation.
Preview potential buyers, for free
OffDeal leverages advanced technology and expertise to help small business owners achieve the same quality of M&A service previously reserved for large corporations. Our mission is to ensure every business owner has the opportunity to maximize their value when they're ready to sell.
