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Why Deals Fail: Unrealistic High Asking Prices Are Usually The Culprit

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.

Categories: BizBen Blog Contributor, Business Valuation Issues, Deal And Escrow Issues, Due Diligence Issues, How To Buy A Business, How To Sell A Business, Selling A Business

Contributor:

Peter Siegel, MBA
Areas Served: Nationwide - All Areas
Phone:  925-785-3118 Cell, 925-785-3118 Text
Peter Siegel, MBA - Founder Of BizBen.com (over 25 years), I am the Lead Advisor for the ProSell, ProBuy, & ProIntermediary Programs. I advise/coach buyers, sellers, and brokers daily about buying & selling small to mid-sized businesses throughout the Nation. I can be reached direct at 925-785-3118.

Comments & Feedback From Pro Intermediaries & Pro Advisors On BizBen:

Posted By: Timothy Cunha JD, Business Broker: San Francisco Bay Area    

A realistic initial valuation of a business and a SWOT analysis of its "strengths, weaknesses, opportunities, and threats" is essential to a successful business sale. Not only can sellers determine the realistic market price for the business as it now stands, but they can also learn specific practical steps to make their particular business more valuable and command a higher price. We provide a free no-obligation value analysis for any business owner who anticipates possibly selling the business sometime in the future. It's accessible on line, takes about 15 minutes to fill out, and results in a 25-26 page report. Just contact me.


Posted By: Joe Ranieri, Business Broker: LA, Orange Counties, California    

Although sometimes even the best business brokers can not hold a deal together, there are somethings that we can do to improve our chances. Since the buyer may not be approved by the landlord before opening escrow, it's possible to at least inform the landlord and get a rough idea if the buyers are going to have problems by showing the landlord their credit score, asset/liabilities, and perhaps a business plan the buyer may have for the business. Most landlords will make it clear if they will write a new lease or give the new buyer an option on the existing lease, if there is no option at the time. Landlords many times have been the culprit of deals going sideways, and often times the higher the rent the current occupant is paying, the more critical they are, because suprise suprise, landlords are manly concerned with just getting their money.






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