Why Owners Should Reasonably Price Their Businesses

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When discussing the value of a small business with its owner, we often run through the importance of fairly pricing a business. The ideal asking price is 8-12% above the ultimate close price. Why? Many owners are ultimately selling their businesses to fund their retirements. They’ve spent decades building their businesses into what they are today. It’s important not to leave a lot of money on the table. On the other hand, overpricing a business has a number of risks.

1. Signal of an Irrational or “Unmotivated” Seller

Some buyers may fear that an abnormally high asking price is indicative of an irrational seller. They may think that the seller is simply kicking tires on the market, or is pricing their business according to what the owner wants vs. what the business deserves.

Given that submitting an offer is just the first step in a 30-90 day process to close the acquisition, buyers may fear that it will be tough to get to the finish line if they're already starting off with a price far from the "market" value.

2. Selection Bias

When buyers see a very high asking price, they may self-select out of even reaching out to the owner or business broker. 

Most buyers on “main street” are individual entrepreneurs. Many have a 9-to-5 currently, whether they work in Corporate America, run their own business, or work for a small business in the area. Given they are busy, they try to be relatively selective with the businesses they approach. 

If there’s a clear gap between the asking price and what the business is likely worth, many buyers may move on to more reasonably priced options. 

3. Wasting Time on the Market

We’ve seen previous instances where an owner has a very highly priced business on the market. After waiting for a unicorn buyer who is willing to entertain a negotiation around that price, they ultimately are able to strike a deal at or near their asking price. Everything seems to be going well, until the buyer goes to arrange financing for the deal. Then what?

Well, the bank underwrites the business and quickly comes to the determination that the business’s cashflow cannot support a loan at the asking price that the owner has.

By that point, the owner has spent months on the market, meeting with buyers, running down diligence requests. The buyer has spent money on a CPA or attorney as well as his or her own time working with the bank.

And, the deal’s off. No one is happy.

Beacon’s Tips on Pricing a Business

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Sam Domino
Sam Domino
Transaction Advisor

Sam is an exit planning expert, combining years of experience working with small business owners with extensive knowledge of traditional and SBA financing.

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.