It is absolutely shocking how many businesses end up on the market with a ridiculously high valuation and an outrageous asking price.
Why does this happen? When a seller is allowed to decide on an asking price, the value they place on their own business usually has little to do with what the business is actually worth to a buyer and more to do with how much money they feel they have invested, how much they think they’ll need for retirement, etc.
Many business brokers allow their clients to set the listing price simply because they want the listing, not because it is what is in the best interest of the seller. Some sellers and brokers alike also set an asking price high because they want to use it as the high end of a negotiation scheme. What this does in reality is drive away buyers and stick the business in listing purgatory.
As a buyer you are likely going to deal with listing prices that are way too high, but the solution is not to send in a low-ball offer and hope it sticks. That is the last thing you should do because it will almost always severely offend a seller to the point that they will refuse to work with you. On the other hand, you are not willing to overpay for a business, so what should you do?
The answer is initially ignore the asking price, as long as it is generally in the ballpark of what you are looking to spend. For instance, if you are only willing to invest $50,000 in the purchase of a business, you should probably not consider businesses listed for $300,000. If you initially ignore the listing price, you will give yourself a chance to determine what the business is worth to you.
How do you determine what you should offer? First and foremost, use your business broker for help. They know what comparable businesses have sold for, what the local competition means in terms of price and what the industry trends are. You will also need to look at the business and its numbers to see if fits with what you are looking for. Whatever you offer will need to be backed up with why you think that price is appropriate, so consider all aspects before deciding on an offer.
Also, the better the relationship you have with a seller, the better your transaction will be, so be sure to give a respectful offer with some real reasoning behind it. Trying to start negotiations by sending in a very low offer is as ridiculous as the seller setting an outrageously high price as a starting point for negotiations. The two sides will be too far apart for any meaningful negotiations to begin.
The moral of the story is that everything in a business transaction is negotiable, so just because a business is listed at a specific price it doesn’t mean that is what it will sell for.
Are you a buyer who can’t seem to find a business with a reasonable listing price? Do you have questions about how to determine what you should offer for a business? Please feel free to leave us a comment or question here, and we will be happy to help you.