How Important is the Asking Price?
Depends on whom you are asking. If you’re the seller, you might say that the asking price is too low. The buyer would say, obviously, that the asking price is too high. How can they both be right? Who decides?
Most sellers have an idea of what they want for their business. It can be based on their knowledge of the industry and what similar businesses have sold for. It may be, however, based on just a wish. There is the old, but true, story of the two partners who decided to sell their business. When asked what the price would be, they both responded with the same answer – $2 million. When asked how they arrived at that price, they each said that they wanted to be a millionaire and two times $1 million was $2 million.
Sellers often say that the asking price doesn’t make any difference since it can always be reduced. What they don’t realize is that if the price is not realistic, buyers won’t even look at it. Buyers are aware that they can make an offer, but if the starting point is too high, what they consider a fair price may be so low that why bother even making the offer.
Studies using various data bases comparing actual selling prices of businesses with their asking prices show that the difference is about 15 percent for small businesses. The larger the business, the smaller the spread. Businesses sold for $1 million-plus sell for about 90 percent of the asking price, while smaller ones sell for about 85 percent of the asking price. The important thing to remember is that the data is based on sold businesses only. There is no data, obviously, comparing the businesses that didn’t sell.
Sellers have to keep in mind that starting with too high an asking price may well prevent a very qualified buyer from even looking at the business. You know your price is too high and that you will come down, perhaps even significantly, but the buyer doesn’t. What is the right price? A business broker professional has tools to help sellers arrive at a reasonable starting point. There may be comparable market data based on similar sales. There are methods based on the cash flow of the business and a multiple using other business factors such as location, down payment requirements, competition, annual sales variations and other determinants.
Ultimately it’s the marketplace that decides the ultimate selling price. Serious sellers listen to the marketplace. After all, if 10 buyers are willing to pay X for the business and there are no other buyers, the price is X. The seller doesn’t have to accept that price, but he or she must accept the fact that the market will only pay X for their business.
Since studies of thousands of business sales show that the sales price ends up being, on average, 85 percent of the asking price – so sellers shouldn’t dream or wish for too much.
Read MoreWhy Your Business Won’t Sell
What are the odds of your business actually selling once you have made the decision to sell? Well, if the annual sales of your business are $750,000 or less, research indicates that the odds of your business selling are only 18 percent. If your annual sales are $750,000 to $2 million, your odds increase to 25 percent. If your annual sales volume is above $2 million, the odds increase to 30 + percent. Keep in mind that approximately 75 percent of all businesses have annual sales of less than $750,000.
What does this all mean? To put it bluntly: if you are thinking of selling your business, you have about a one in five chance of it actually selling. This obviously begs the question: why are the odds so poor? One would think that if you put your business on the market, it should sell in a reasonable length of time. Here are some reasons why some businesses didn’t sell-as explained by various business brokers and intermediaries. They are excerpted from an article in INC magazine, April 2002.
- The business is no longer listed for sale. The cash flow was strong, but a lot of buyers thought that the deal was overpriced.
- Buyers were intrigued, but the economics of the deal wouldn’t make sense, and the seller wouldn’t negotiate.
- There was serious interest, but the owner got distracted by an arrangement with a friend to solicit offers. None came through.
- We almost had a deal, but financing was impossible to find.
- We had three offers, including an accepted bid for $4 million, but the buyer couldn’t get financing.
- The deal dragged on for months but fell apart for lack of financing. . .
They say that timing is everything. Many business owners wait until the economy is down. Their own business is also paying the price for the slowdown, so they elect to sell. Now they discover that the price they thought they could get for their business is not realistic in today’s market. Sellers should keep in mind that the best time to sell is when their business is doing well.
One factor that emerges from the comments by intermediaries above is the lack of financing. This would seem to indicate that the sellers wanted all cash, or, at least, a good portion of the selling price in cash. Three of the comments stated that the reason the deal didn’t go through was that “financing was impossible to find,” “the buyer couldn’t get financing,” and “…fell apart for lack of financing.” The reasons that obtaining financing is so difficult are (1) the business doesn’t qualify for financing, (2) the buyer doesn’t qualify for financing, and, most importantly, most small businesses are not financeable. Banks are generally not interested; the Small Business Administration (SBA), although certainly an option, only comes through in less than 10 percent of deals. If lenders are not interested in financing the sale of the business, there are only two choices: the buyer pays all cash or the seller finances the sale.
Tips for a fast sale
- Have up-to-date financial information available
- Prepare a current list of fixtures & equipment
- Maintain normal business hours
- Spiff up the business
- Set a realistic price
- Be willing to negotiate
- Gather all of the information a buyer might like to review
Here are two major ways to increase the odds that your business will be the one in five that sells:
- Make sure that you are serious before you put your business up for sale. You should be willing to accept, within reason, what the marketplace is willing to pay. It’s not what you want for your business, or what your accountant says it’s worth – it’s what a buyer is willing to pay. Find out if the price you are asking is in the “ballpark” before you go to market. Your local business brokerage professional is a good place to start. He or she can tell you what similar businesses have sold for and what you might expect to receive if you sell now.
- Be willing to finance the sale of your business. Counting on the businesses selling for all cash or assuming that the business can be financed will most likely make your business one of the four that don’t sell. By showing your willingness to assist in the financing, you reassure the buyer that you have confidence in the businesses’ ability to finance itself. Also, keep in mind that by financing the business you will be entitled to interest on the balance, thereby increasing the price you will receive.
Following these guidelines and tips might not sell your business, but it will certainly increase the odds. Almost any business will sell under the right circumstances. If you are serious about selling, the first step would be to call a professional business broker. He or she can answer all of your questions about the selling process and what it takes to sell your business in today’s economic climate.
The Perfect Business
The perfect business, the one that would be sure to sell, has the following attributes:
- a reasonable price
- a reasonable down payment (hopefully 40 percent of the full price or less)
- seller financing
- reasonable sales (hopefully increasing each year)
- seller earnings of $60,000 or more
- a compelling reason for sale
- a desired or popular industry type
- attractive and strategic location (if important for business type)
There is an old saying that goes something like this: “The worst day of working for yourself is better than the best day of working for someone else.”
Selling Your Business — What’s the Reason?
There was a study done, years ago, that showed that the reason businesses were for sale had a direct relationship to its probability of sale.
| Reason for Sale | %Reason for Sale | %Probability of Sale |
| Retirement | 10-15% | 30-35% |
| Health Problems/Death | 15-20% | 25-30% |
| Partnership & Family Problems/ Divorce | 5-10% | 15-20% |
| Burnout/Other Business Investments | 15-20% | 15-20% |
| Under-capitalization | 20-25% | 10-15% |
| Insufficient Profits | 20-25% | 5-10% |
| Profit Motivated Only | 5-10% | 0-5% |
The above results point out the more serious or valid reason for sale, the higher likelihood that the business will sell. Despite its age the results today would probably be more dramatic. Most of those looking for a business to purchase in today’s market would shy away from businesses that are under-capitalized, showing insufficient profits or any in which the seller was just attempting to sell for profit only. Today’s buyer is better educated, has more knowledge about business and is more wary than his or her predecessor. The financial records better be complete, all information available – and the seller must have a valid reason for sale.
It is evident from the results above that such reasons for sale as: retirement, health issues, family problems followed by “burnout” have the highest probability of sale. Burnout is not a new issue, but it is generally preceded by many years of doing the same thing. It’s difficult to accept burnout from a seller who has been in business for only a short time.
There is an old saying among business brokers and that is that it takes a willing seller – and a willing buyer to complete a successful sale. The moral of all this is that the more valid the reason for sale, the better the chance the business will sell quickly – and without undue problems.
Finding a Buyer Is Just the Beginning
Many people who are selling their business think that once they find a buyer, the business is sold. Unfortunately, the real work is just beginning. Once a buyer is interested, there are the inevitable questions that must be answered. After the questions are answered and the buyer has satisfied himself or herself that the financial aspects of the business are satisfied, the buyer is probably ready to make an offer.
An offer is prepared and it generally contains contingencies or conditions on which the offer is subject to, in addition to offering the price and terms under which the buyer is prepared to pay. Assuming the price and terms are acceptable to the seller, the next step is for the seller to do what is necessary to satisfy the contingencies. These can be as varied to the buyer’s reviewing all of the seller’s financial books and records, a serious look at the lease and its terms to a requirement that the seller pave the parking lot or redo the rest rooms.
Definitions
Offer – an expression of willingness to purchase a property [business] at a specific price [and terms].
Contingency Clause — see Condition
Condition(s) – provision(s) in a contract that some or all terms of the contract will be altered or cease to exist upon a certain event.
Conditional Offer – purchase contract tendered to the seller that stipulates one or more requirements to be satisfied before the purchaser is obligated to buy.
Dictionary of Real Estate Terms, published by Barron’s Real Estate Guides
The first task for the seller is to accept the price and terms then review the contingencies to insure that they are reasonable and acceptable. If the price, terms or contingencies are not acceptable then a counter-offer is prepared and the terms that are acceptable to the seller presented to the buyer. Once the parties agree upon all of these items, then the job of satisfying the buyer’s contingencies is begun. A time period in which all of this must be done is usually specified in the offer. If such a time period was not specified, the buyer could take his or her “own sweet” time before approving – or not. The seller obviously has to furnish the materials and information necessary for the seller to satisfy himself or herself.
If the buyer is satisfied that everything is as represented, he or she signs what is termed a Contingency Removal form. If everything is not satisfactory to the buyer, then the offer can be renegotiated or the sale falls apart and the buyer’s deposit is returned and the seller is now back to square one!
Unfortunately, a lot of time can elapse between the offer and acceptance and the buyer deciding to move forward. Time is the essence of the deal and the longer it goes the more likely that serious problems can develop. If these problems are not addressed promptly, the pending sale can fall apart and then the seller must then look for another buyer and begin the process anew. The professional broker is aware of all of this and can greatly assist the seller in making sure that only serious and committed buyers begin the process.
Let’s assume that the buyer and seller are in agreement on price and terms. Now comes the task of gathering all of the information necessary for an escrow company or closing attorney to draw the necessary paperwork. The seller must also gather the lease information, insurance data, equipment lists, inventory information and everything else necessary to close the sale.
If the buyer is using outside financing, then the seller, along with the buyer, must gather all sorts of financial date to submit to the lender. There are also the various representations and warranties the must be reviewed – and approved, by the parties involved.
As one can see, the path from finding a buyer to the closing of the sale is an arduous one and fraught with problems every step of the way. Only an experienced professional business broker can guide both parties through the maze and insure that every step is addressed and covered satisfactorily.
Sellers – Here’s How Selling Your Business Can be Made Easier
If you’re considering selling your business consulting with a professional business broker is your first step. They can assist in all of the areas mentioned in this newsletter. In addition they can do the following:
- Greatly increase the number of potential buyers through their own databases and the various Web sites available to them.
- Help in pricing the business so it will be competitive in the marketplace.
- Will keep you advised on market reaction.
- Present only qualified and serious buyer prospects.
- Handle the details so you can spend your time operating your business.
- Coordinate all of the paperwork so the sale can be expedited quickly and easily.
Selling a Business?
- Prepare for new management. As soon as you make the decision to sell, begin doing what you can to help the business run “on its own.” The business should not, especially now, be just you!
- Accept the financing facts. You’ll likely be financing the sale of your business, since banks are traditionally unenthusiastic about loans for the purchase of most businesses.
- Make sure your own financials are accurate, detailed, and up-to-date. Get professional help, if necessary, to present yourself well “on paper.” Remember – this means seeing yourself in the same light as a prospective buyer, so rethink all those “perks” and hidden assets.
- Spruce up and pare down. Sell unused equipment and inventory. Nobody will want to pay for it – but they might worry it will get tacked on if they see it lying around. This is a good time to see what else needs a bit of spit and polish to make the best possible impression.
- Establish a realistic price for your business.
- Keep your selling plans to yourself, at least at the outset. Employees might react poorly to your “news,” and you need their stability more than ever at this crucial time.
