Selling a Business: The Importance of the Right Price
25 July 2022: Selling a Business: The Importance of the Right Price
If you’re selling a business, the importance of pricing it correctly cannot be overstated. And before you roll your eyes, slap your forehead and say, “DUH, everybody knows that!”, I make that statement NOT because a business priced too far above value will never sell and one priced below value means the seller will be leaving money on the table.
Rather, I make that statement because, if the seller has planned for life after the closing and is banking on the proceeds of the sale supporting that imagined lifestyle, there’s a good chance the seller will be unable to live the life they imagined if they don’t know what the business is worth before going to market.
A True Story of Foolishness
We’re tangentially involved in a situation like that right now.
In last week’s post, I described a situation near our office where a divorcing couple owned a business that the husband estimated was worth about $2 million. Our brief look at the finances (we didn’t do a full valuation; the owner didn’t want to pay for one) suggested its value was somewhere in the vicinity of $500,000.
Time passed and maybe two years later we received an email from the owner stating something along the lines of, “I’m going to put my business on the market for $1.8 million. If you have a buyer…”.
Well, that was about two years ago and, as detailed in last week’s post, the price has gradually dropped.
Unable to sell it himself, the owner has now listed the business with a successful residential real estate agent. The agent, who knows we exist and what we do – called a month or so ago to see if we could help. In response to our request, he subsequently sent the financials.
We offer a comprehensive coaching program – both group coaching in our Brokers’ Roundtable community as well as one-on-one coaching – tailored to Realtors, business owners , buyers and anyone interested in valuing, buying or selling a business.
If you’d like to learn more, email me at jo*@Wo*******************.com
As we always do when presented with a realtor’s problematic listing, we asked for how the current price – $1.5 million – was arrived at. After about 30 minutes of discussion, he admitted that the price made little sense and that he’d speak with the seller about lowering it.
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The Real Issue
But regardless of what the seller is willing to do at this point on price, the real issue is what the seller had planned to do post closing. This is where a professional broker starts the transition conversation.
Why? Because if a business owner has plans for his post-closing life that need to be funded with $1.5 million, it’s a pretty sure bet that $500,000 ain’t gonna get the job done.
So, what happens in an instance such as this? Well, there are only two options.
- The seller will have to decrease the price so the business sells – and significantly scale down his post-closing plans or;
- Postpone the sale for a few years and continue working to build the business so that it’s value is something close to what he needs to fund those post-closing plans.
There’s really no middle ground – other than hoping that someone with more money than sense comes along and just has to have this particular business in its particular location. But hoping someone will show up and willingly pay two or three times what a business is worth is, to say the least, a long shot.
The Bottom Line
Even after more than twenty years in this business, it still surprises me when residential real estate agents try to sell businesses. After conversations with the realtor in this instance, he has to know that the likelihood of ever getting paid for his work trying to find a buyer for this one is slim to none.
But the owner of the business is where most of the blame lies. The real estate agent had no idea what the business was worth and took the listing at the price the seller wanted. We’ve dealt with many owners over the years that either didn’t want to hear the bad news about the value of their business or wanted to try to save a couple of bucks on the commission, In this case, it might be both.
Over-pricing is one of the top three reasons that most businesses that come to market don’t sell. (Another one of the top three is representation by a real estate agent. This seller has hit two of the top three. The odds are getting longer…)
When selling a business, sellers and brokers MUST know what the value of that business is. In the case of sellers, planning for a life after the sale is ludicrous without the knowledge that they’ve got an asset worth what that life will cost.
For the broker, the amount of time and money spent – wasted – on trying to sell something for two or three times its value, is time and money they’ll never recover. And bringing a business to market at two or more times its value will damage the broker’s reputation to the point that other brokers will be very caution about working with them.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at jo*@Wo*******************.com.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
The president of a U.S.-based investment capital group has contacted us about acquiring HVAC and plumbing contractors with revenue of between $2.5 million and $50 million. This buyer is searching for multiple opportunities anywhere in the U.S. and can close quickly.
If any of you know of something that might fit, please let me know.
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 500 in the world. He can be reached at jo*@Wo*******************.com