The unfortunate truth is that approximately 50 percent of all small to mid-sized business for sale transactions fall through. Failed transactions can happen for a variety of reasons, i.e. the owner/seller has poor record keeping abilities, the business location has an unattractive lease, and even a lack of motivation for the owner to get a deal done, etc. While many of those reasons have led to failed deals, the most common reason that deals fall through is because the seller has listed their initial asking price much too high or the deal terms just don't pencil out.
When a business owner lists their small business for a price that seems otherwise unreasonable to potential buyers, it ultimately scares off the majority of those buyers who were genuinely interested in buying the business. Business owners who have invested a lot of time and money into their company want to get top dollar for their hard work, even if it means valuing their business where they believe future profits would have taken them, or in the ballpark of what their business was worth before recessions or downturns in the economy.
If a business owner has their business priced too high and begins negotiations with a potential buyer who is willing to buy the company for much less than the listed price, it is important to keep an open mind and work toward understanding why people aren't willing to pay the full asking price for their business.
As a seller, you may have come to your asking price without having your business properly valued/appraised (such as utilizing a business valuation professional and/or the BizBen.com database of pre and post sale comps), and may need to reevaluate your stance on your asking price (and deal structure) and seek professional assistance. This is critical since the first thirty to forty five days of a business being on the market to sell is the most important time period to get things (valuations) right!
As a potential business buyer, it is critical to be able to support your value of the business you are interested in purchasing with hard facts. Analyzing a profit and loss income statements and business tax returns from the previous 3 years is an excellent place to start and is among the numerous things that will play into the process of valuing the business - but there are other documents and information that you'll need to really determine what the small business is truly "worth".
After an offer is made, both parties must work together to understand where the other side is coming from and that everything is negotiable. If you aren't willing to budge or negotiate, you'll never get a deal done. Both parties (sellers and buyers) should develop a rapport with one another to show good faith and support their reasoning for prices in a way that doesn't scare the other party out of a deal. Neither party should become excitable or get offended by the other person's offer/LOI/purchase agreement, but rather strive to make a deal that benefits both sides based on supporting documents and information.
Contributor:
I am the Founder Of BizBen.com. I consult daily with intermediaries, business buyers, owner/sellers & advisors daily about buying and selling California small to mid-sized businesses. Contact me today about joining & utilizing BizBen, consultations, & advisory services.
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