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Is Starting With A Higher Selling Price A Good Strategy? Showing An Asking Price?

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Comments & Replies: 7     Views: 3701     Posted By: Business Broker  

Is starting with a higher selling price a good strategy when selling a small business? or even showing an asking price? I have some definite ideas about this concept and would like to share along with other Advisors, Brokers, Agents contributors on BizBen. What are your thoughts on asking prices?

Topics: Deal Structures, Selling A Business     Tags: business valuation, deal structures, selling a business

Setting an "asking" price is always a tricky proposition. As business brokers, we have access to data regarding sales of comparable businesses, we know the current state of the market, and we can evaluate the effect on of sales trends, leases, employee retention, profitability, and so many other factors on the likely price that the market will determine for the business. But, it's always a range -- there's nothing finite about business valuation; and, the ultimate price paid often depends on the type of buyer: a "career-seeker", an "investor", or a "strategic player."

Nevertheless, the initial asking price cannot be set so high as to be "Incredible." Such a price casts suspicion on every other representation made by the seller. Similarly, setting the price too low in an attempt to get a quick sale, raises the question: "What's wrong with this business that they want to give it away?"

Sure, an unrealistically high price can always be lowered; but, as the old adage says, you don't get a second chance to make a good first impression. In any given market, there are a finite number of buyers interested in any particular type of business.. once they have "passed" on a business because of price, it's really difficult to draw them back in with a new lower price.

Proper pricing is just one more of the many reasons that it doesn't cost to hire a professional business broker; rather, it pays in more profit and less hassle for the business seller.

Good points by Craig and Tim - thank you for contributing on these important topics. I would like to add my perspective from counseling both owner/sellers on the BizBen ProSell Program and motivated business buyers on the BizBen ProBuy Program.

Here are my observations with assisting both owner/sellers, brokers, and buyers on pricing strategies:

1. Most owners when they first go to sell their small business price their business too high. Remember 70% of all California small businesses never end up selling - with the main reason being too high of asking price. The second reason is that the deal structure that the seller has determined best has not taken into consideration what may be best for potential buyers as well (remember the deal structure has to benefit both parties for the deal to get realistically completed!)

2. Since I do a lot of business purchase financing (consulting and placement) - if a business is not priced "correctly" a deal will not get the funds for financing - most sellers and buyers don't take this into consideration tanking many deals unnecessarily. Bottom line you need to have a realistic price on the business being sold to get business purchase financing (SBA lenders mandate a 3rd party business appraisal during the escrow/closing process)!

3. The first 30-40 days in a business for sale advertising campaign online is the most important time period for sellers! If a business is overpriced and then the owner tries lowering the purchase price over time - this can look suspicious to potential buyers who may be apprehensive about such moves. Many buyers tell me they ignore sellers in many instances who "play the game".

5. On the topic of not putting a price on a small business (under $1M in sales price) - when going to market - in my opinion this is not necessarily the best strategy. Most buyers I consult with on the BizBen ProBuy Program tell me they feel uncomfortable making an offer on a business were there is no price listed. They feel they don't want to "insult" the owner with a potential low price and they also feel they don't want to overpay for the business (this is a very real concern)!

6. Bottomline when you go to sell a business set an asking price that makes sense (have a realistic reason/narrative of how you determined the price - know the return/ROI for the buyer etc. based on the asking price and why it makes sense for them as well, etc.). Buyers love to hear how you "realistically" determined the selling price (and deal structure) - it shows the you are also concerned about the entire deal and that potential buyers are getting a "fair" price and deal.

This topic of pricing a business for sale correctly (when first going to market) and whether to show a price on a business (verses leaving the asking price "hidden") are really important topics and will be addressed in several BizBen vlogs and podcasts over the next couple weeks!

Contributor: Business Broker, Inland Empire Area

This is a very important point that is being addressed. I agree with the comments made in this post. In addition to those comments, in my experience, a seller wastes a lot of time trying to get an unreasonably higher price or find that buyer who needs a visa and will pay an enormously higher price for the business - this has never happened in the businesses that I have represented. The seller ends up loosing precious time, rejecting good buyers and their offers and, this directly affects a broker's ability to perform.

Recently, I came across a seller who believed their business was worth close to 50% more than my Broker Opinion of Value. While I agree that a BOV is not 100% accurate, 50% is a big gap and I had to respectfully decline representing the seller. While on the other hand, there are sellers who would like to pricing the business reasonably higher to leave room for negotiations - this is understandable and advisable. My advise to those sellers is to price the Business within 5-10% of the acceptable price.

This is one of the two most important reasons why businesses do not end up selling, the other reason being time.

I find setting a price above market asking price is never a good idea, but if you have to it's important not to exceed the market asking price more than 10%. It's become easier now, but a few years after the financial crisis of 2008, it was more difficult, because of where buyers had previously received their funds (loans, home equity lines of credit, etc.), which inflated selling prices significantly. Most sellers want cash, and most buyers only have cash to spend on low-mid priced businesses, and so this definitely affects the asking price, if the seller can carry a note it's possible they can receive a higher asking price, but I find most sellers want to be cashed out.

If a broker does take a listing that exceeds the market asking price, than I find the best way to work with that seller is constant communication. It's very useful to use BizBen's page views feature on the business posting, so that the seller can see just how many views they are receiving, compared to other business postings, which are similar. When I talk with a seller over the course of the listing, I will still gauge their motivation for selling, an example perhaps they wanted to sell originally because their spouse was going to take a new job out of the area, but later I talk with them, and that opportunity has fallen through, and so they are not so motivated. A broker's greatest asset is their time, and so we must ask ourselves if it is worth it taking a listing for a business that is greatly over-priced.

Contributor: Broker/Consultant: Elderly Care Services

It sure is easier to go down than it is up on price. Everyone wants to win and in the eyes of a Buyer, receiving a reduced sales price is a big big "win." As long as the business is priced correctly and margins are allowed for negotiations all parties can come out of a sale with a win.

  Helpful Resources To Assist In Selling And Buying California Businesses

Mark Chatow, Esq.: Legal Services For Buying, Selling Businesses

Mark has a broad range of small business purchase & sale experience from analyzing potential acquisition targets to successfully guiding buyers and sellers through the purchase & sale of small businesses. Mark can assist with contracts, negotiations, legal matters, etc. Reach Mark at 949-478-8393.

Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 800-864-0420.

Janet Carrera - Escrow & Bulk Sale Services - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Elizabeth McGovern: Escrow Services - SF Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Brad Steinberg, Broker - Laundromat Specialists

Laundry specialists - founded in 1968 by three laundry professionals, PWS is a family-owned corporation. Through the years it has grown to become the largest vended laundry equipment distributor in the United States. Call Brad Steinberg at 323-721-8832 to sell or buy a coin or card laundromat.

Helen Yoo: Escrow & Bulk Sale Services - Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Diane Boudreau-Tschetter: Escrow And Bulk Sale Services

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

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