The Importance of Setting a Realistic Offering Price
In the last issue (#10), we discussed SDE and Business Valuation Variations amongst Sellers, Buyers and Lenders. In this issue we will discuss The Importance of Setting a Realistic Offering Price.
"Facts are stubborn things." Ronald Reagan
The Importance of Setting a Realistic Offering Price
Throughout our newsletters we’ve stressed that only about 20 – 25% of all small businesses ever sell. There are lots of reasons for that ugly statistic, but the number one reason is owners’ lack of realization of the need to plan for the sale of their businesses. Without planning, all sorts of obstacles are encountered that have the potential to detrimentally affect salability.
An unrealistic offering price is a major obstacle to a successful business sale
Rated extremely high on a list of reasons businesses don’t sell, perhaps as high as #2, is owners who try to sell their business at an unrealistic offering price.
Some owners think they can find the greater fool to acquire their overpriced business. Others may overprice the business to intentionally leave negotiating room. Others are misled by untrustworthy business brokers who accept overpriced businesses because they are desperate for listings. Some owners may not even realize their business is overpriced.
Don't count on the greater fool as the buyer of your business
You will not be successful in finding the greater fool. Although most of those looking to acquire a business are first-time buyers who might make a foolish offer, ultimately they use qualified professional advisors in the due diligence phase. In addition, when a buyer applies for a loan for the acquisition, the lender will not provide financing above the fair value of the business. Foolish buyers will eventually come to their senses and back out of a transaction based on the advice of their professional due diligence advisors and their lender. Unless you are open to a significantly reduced offer, the transaction will die and everyone will have wasted their time. That can be emotionally painful because your high hopes are dashed.
Pricing the business at an unrealistic value is counter-productive
The value of most small businesses can usually be established in a pretty tight range (within about 10%). Pricing the business above the top end of the range for negotiating purposes is counter-productive. Many qualified and serious buyers, those who have been looking for a while and have previously been through the trials and tribulations of dealing with unrealistic seller expectations (only to be disappointed), take a pass on pursuit of businesses they know are overpriced. They don’t want the headaches.
Better business brokers can help set a realistic offering price
Overpriced businesses are a huge problem in the business marketplace. It happens much too often. Inexperienced and less-than-truthful business brokers are major contributors to the problem. Far too many business brokers, in need of businesses to sell, will accept overpriced listings knowing that ultimately the market will adjust the seller’s expectations. The brokers are hoping against hope that sellers, once the owners realize the true value of the business, will accept offers far below their (unrealistic) asking price. But that is not a good way for those brokers to work with and represent owners. All it does is set up the owner for a long and painful sale process that does not usually come to fruition. This particular issue – brokers who will not be honest in helping owners set realistic offering prices – is a major contributor to the lack of success in selling small businesses. Better business brokers will provide honest feedback on the realistic value of the business, and will not accept listings with unrealistic offering prices. It is extremely important to have the right business broker representing you in the sale of your business and to avoid those who are just looking for a listing … any listing at any price.
Trying to sell an overpriced business can be very painful and risky
Selling is rarely easy, but it does not have to be painful. Regardless of your efforts to sell at an unrealistic price, it’s not going to happen. There are too many checks and balances. Ultimately, you will come to the realization the business will not sell beyond its fair value. There is nothing to be gained by going through the exercise of trying to sell at an unrealistic price, but there is a lot at risk. Even if you are aware the business is overpriced, the mental adjustment to modify your expectations can be stressful. You may become so discouraged that you don’t even want to continue the sale process. In addition, better buyers won’t even look at overpriced businesses and the risk of a confidentiality breach increases significantly because the attempted sale process takes so long.
After finishing this newsletter, consider also reading another of our newsletters: Issue #60 – Owners With Unrealistic Price Expectations, which discusses the obstacle created by unrealistic expectations.
Finding the right business broker to help sell your business is a very important step in the business sale process. For further insight, read our Special Report, Insider Secrets to Selling Your Business – Business Broker Best Practices and Selection Criteria.
"The tendency of an event to occur varies inversely with one's preparation for it." David Searles
Overcome the Power of Inertia
Overcome the Power of Inertia and call a business broker for a free consultation. Many brokers offer no-charge, no-obligation evaluations of small businesses. They can provide a broker opinion of value and help you identify obstacles to a successful sale as well as opportunities for improvement to increase the value of your business. That is a great way to start planning for a successful and profitable exit from your business.
