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 …
