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Is The Old Adage True: Your First Offer Is The Best Offer - When Selling A Business?



Posted By: Joe Ranieri, Business Broker: LA, Orange Counties.   Sometimes business brokers just can't win with their clients, because if an offer comes in too fast & too early then they must have lowballed the price & the seller is suspicious, and if not enough offers come in after putting the business on the market - they may look unproductive to their clients.

Sometimes business brokers just can't win with their clients, because if an offer comes in too fast and too early then they must have lowballed the price and the seller is suspicious, and if not enough offers come in after putting the business on the market then they must not be doing enough advertising. A high priced offer from an unqualified buyer can be frustrating for a business broker because it skews a seller's expectations. Typically, most people whether they are selling their home, car or other personal property, they believe that it's worth more than it is, so if a high-priced offer comes in fast, it only validates that claim.

Selling a business is about finding the RIGHT buyer for the business. Selling a business under most circumstances takes time. I might write multiple offers on a business before finding one that's acceptable. Even if I know a seller may not accept an offer that a buyer wants to write up, I'll still write it up and if it's unacceptable have the seller write "Rejected" and initial so the buyer knows I'm not holding them at bay as a negotiating tactic and they know where they stand and can either counter, write up an acceptable offer, or move on and look for another business.

The first month of a business being on the market there is a flurry of activity and so a seller should not tie themselves down to an initial offer that is probably not going to go anywhere. When a qualified buyer comes along a seller should work with them, because it is true that the longer a business sits on the market the less eyeballs see the business and that my welcome buyers who try to take advantage of the seller.

The key to a seller knowing if the first offer is "best" is having a reasonable and realistic market valuation. There should be some rational demonstrable basis for the price being asked. Willingness to discount a price too much or too quickly raises red flags of caution for buyers.

Sellers also have to realize that the "best" offer is not necessarily the highest offer--rather, it's the offer that will justify financing, from a reliable buyer with the resources and ability to actually close the deal. Furthermore, the price can often be justified by the structure of the transaction; here a professional broker can provide the expertise and creativity needed to devise a win-win deal structure.

Back-up offers are important, and they help keep the initial buyer on deadline. Nothing kills a deal more than the passage of time; and, some buyers suffer from "paralysis by analysis." They can't make a decision or keep to a time schedule. You need alternative options.

The key to a seller knowing if the first offer is "best" is having a reasonable and realistic market valuation. There should be some rational demonstrable basis for the price being asked. Willingness to discount a price too much or too quickly raises red flags of caution for buyers.

Sellers also have to realize that the "best" offer is not necessarily the highest offer--rather, it's the offer that will justify financing, from a reliable buyer with the resources and ability to actually close the deal. Furthermore, the price can often be justified by the structure of the transaction; here a professional broker can provide the expertise and creativity needed to devise a win-win deal structure.

Back-up offers are important, and they help keep the initial buyer on deadline. Nothing kills a deal more than the passage of time; and, some buyers suffer from "paralysis by analysis." They can't make a decision or keep to a time schedule. You need alternative options.
I think the operative word is "depends". A number of variables will help determine whether that first offer is indeed the best offer. As an agent, I know that one of my duties is that of protecting my client. What does this mean? It means that as a part of my protection, I need to vet all potential buyers to make sure that we have a buyer that can indeed proceed and complete the purchase. Therefore, things such as proof of funds and loan pre-approvals will help us to ensure that the ball will not be dropped and that we do not waste our time. The last thing that anyone wants is to drop out of escrow, which will do nothing but create a misconception to future buyers that your business is not properly priced or that it is not good investment. Yes, the longer the number of days on the market carries with it an inherent negative stigma. It is like the kiss of death and as an agent I do advise my clients on knowing when to consider taking an offer versus when to decline an offer. I would say, that my experience, has been that the first offer, as long as it is fair market offer, should be heavily considered. Why? One reason is simply put, if it's priced right, a savvy buyer will jump at the opportunity of making a decent offer. Furthermore, a savvy buyer will already have a good idea as to the business value and they will know it is a good deal. So, yes, "depends" will be dependent on your agent's knowledge, experience and his/her ability to guide you properly so that if that ship has arrived that that ship doesn't leave the port without you in it!

I think the operative word is "depends". A number of variables will help determine whether that first offer is indeed the best offer. As an agent, I know that one of my duties is that of protecting my client. What does this mean? It means that as a part of my protection, I need to vet all potential buyers to make sure that we have a buyer that can indeed proceed and complete the purchase. Therefore, things such as proof of funds and loan pre-approvals will help us to ensure that the ball will not be dropped and that we do not waste our time. The last thing that anyone wants is to drop out of escrow, which will do nothing but create a misconception to future buyers that your business is not properly priced or that it is not good investment. Yes, the longer the number of days on the market carries with it an inherent negative stigma. It is like the kiss of death and as an agent I do advise my clients on knowing when to consider taking an offer versus when to decline an offer. I would say, that my experience, has been that the first offer, as long as it is fair market offer, should be heavily considered. Why? One reason is simply put, if it's priced right, a savvy buyer will jump at the opportunity of making a decent offer. Furthermore, a savvy buyer will already have a good idea as to the business value and they will know it is a good deal. So, yes, "depends" will be dependent on your agent's knowledge, experience and his/her ability to guide you properly so that if that ship has arrived that that ship doesn't leave the port without you in it!
I agree with Joe on many of these points but I would also like to add several more of my own suggestions from working with business owner/sellers and brokers and agents in the BizBen ProSell Program. I too believe the first 30 to 45 days are the most critical for selling a small business.

Here are my recommendations for owners and brokers who partake in the BizBen ProSell Program:

1. Price your business for sale correctly from the start - no games, have a reason why you priced the business the way you did - justify your price based on assets being sold with the business, annual cash flow, ROI analysis, history of earnings, competition, the ability for sustained and hopefully future growth. As an owner don't try and price your business yourself - get professional advice - advice without bias one way or the other. Remember 70% of small businesses in California never sell and the biggest factor is too high of price and the second is a deal structure that doesn't make sense! Get a professional business valuation completed before going to market.

2. Always accept back up offers and keep buyers moving forward - always. Have buyers who have given an offer on a time table to get things accomplished - like due diligence, getting approval for financing, meeting with the owner, lease renewal negotiations etc. If the current buyer balks, negotiates in bad faith or generally shows a lack of continued interest - move to the next buyer on the list pronto! As a professional courtesy make sure you let all potential buyers know where they "stand" in waiting to put an offer on your business.

3. Don't play games - let all buyers know where they stand when reaching out about making an offer on your business for sale. Stay firm on your price (remember you can always optimize the deal structure) - as long as you have priced your business correctly from the start you should have no problem getting a willing and able business buyer who sees your pricing logic and buys your business!

I agree with Joe on many of these points but I would also like to add several more of my own suggestions from working with business owner/sellers and brokers and agents in the BizBen ProSell Program. I too believe the first 30 to 45 days are the most critical for selling a small business.

Here are my recommendations for owners and brokers who partake in the BizBen ProSell Program:

1. Price your business for sale correctly from the start - no games, have a reason why you priced the business the way you did - justify your price based on assets being sold with the business, annual cash flow, ROI analysis, history of earnings, competition, the ability for sustained and hopefully future growth. As an owner don't try and price your business yourself - get professional advice - advice without bias one way or the other. Remember 70% of small businesses in California never sell and the biggest factor is too high of price and the second is a deal structure that doesn't make sense! Get a professional business valuation completed before going to market.

2. Always accept back up offers and keep buyers moving forward - always. Have buyers who have given an offer on a time table to get things accomplished - like due diligence, getting approval for financing, meeting with the owner, lease renewal negotiations etc. If the current buyer balks, negotiates in bad faith or generally shows a lack of continued interest - move to the next buyer on the list pronto! As a professional courtesy make sure you let all potential buyers know where they "stand" in waiting to put an offer on your business.

3. Don't play games - let all buyers know where they stand when reaching out about making an offer on your business for sale. Stay firm on your price (remember you can always optimize the deal structure) - as long as you have priced your business correctly from the start you should have no problem getting a willing and able business buyer who sees your pricing logic and buys your business!

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