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

Posted By: Business Broker, SF Bay Area

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?

Tags: business valuation, deal structures, selling a business
Contributor: Business Broker, SF Bay Area

I recently had a client who engaged my services to help them sell their business. I performed a Market Value Analysis and came up with a listing price that I felt would serve them best in the efforts to sell their business. They were excited to move forward and sell their business with one small change. They wanted to increase the listing price of the business substantially, and advertise the business for sale at a much higher price than I had recommended. The owner's reasoning was that we could always lower the price later if it didn't sell, and if there was someone out there willing to pay extra for the business, they didn't want to leave any money on the table.

I informed the business owner that I didn't agree with this strategy for a few reasons. First of all, there will be several similar businesses for sale at the same time and if a potential buyer needs to narrow his decision down to 2 or 3 choices, the business that is priced too high will not get the consideration because they didn't make the first cut. Second, in the eyes of a savvy business buyer, if a seller is unrealistic with his selling price, he will probably be difficult to deal with in other aspects of the business buying process and that alone will keep people from inquiring for more info. Third, a business buyer worked very hard for the money to buy a business and they aren't going to be frivolous with that decision. They have several options of what to do with their money including doing nothing at all.

However, they decided not to heed my advice and do it their way first. The owner said, "Let's try it my way first, then we can try it your way." I advised him that starting high and lowering later may have adverse effects that could hurt his chances of selling his business at all, but nevertheless we went with the price high strategy and well here we are 6 months later at the lower price for 3 months and the business still isn't sold. Even though, several other similar businesses have sold at similar pricing, this owners business remains unsold.

I am curious to know, how the business buying and selling community regards the "price high, lower later" strategy regarding pricing businesses for sale. Has it ever worked for you in the past? All other things being equal, does a business that starts with a high price and lowers later, hurt its chances of selling.

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.

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.

Contributor: Business Broker, SF Bay Area

As a follow up on this topic, I think it's important to remember that your intermediary or agent, does not create buyers. A broker cannot snap his fingers and produce a buyer out of thin air. Brokers don't create buyers, they find buyers who already exist.

I think it's a very important distinction to explain, because many sellers are missing out on buyers.
For any business there are buyers. The trick is to approach the buyer at the right time, when they are ready and willing to buy. There are a million things that come up, and some buyers who may be interested and ready to buy now, may not be in the same situation a month from now.

And the opposite holds true. Sometimes the buyer is there, but just isn't ready right now. Our job as a broker is to be there, when the buyer is looking and present to them an opportunity in an appealing way that causes them to take further action.

Here is the problem though.

Many sellers who list their business want to start high and see what happens, and then lower if they don't get any interest. This however is a slippery slope. Remember placing an ad, does not create a buyer. The buyer is already out there. If you over price your business, you may miss out on the perfect buyer, who would've bought your business, but the price was way out of line for the business.

Nobody wants to over pay for anything. Even the super-rich, don't brag to their buddies about how much they overpaid for something. Everyone brags about what a good deal they got. When you price your business too high, you may miss out on that perfect buyer for your business, because they just moved on because your business didn't fall within the correct pricing model.

A better plan is to list your business for sale at a proper price and stick to that price. As offers come in, don't accept any low ball offers and stay firm on your price. This is a better plan than to price your business high and let buyers submit lowball offers.

Good points by Rob 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: 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.

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