Why Pricing Your Business Too High Can Backfire
One of the first things business owners tell me is:
"I need to get this much for my business."
I understand why. You know how much time, money, and effort you have put into building the company.
Unfortunately, that does not determine what a buyer will pay.
Every business is different. Two companies with the same sales can be worth very different amounts depending on their profitability, customer concentration, owner involvement, growth, employees, and other factors.
When a good business does not sell, the problem is often not the economy, the industry, or the time of year.
It is the price.
What Overpricing Costs You
A business that is priced correctly will often sell within six to twelve months.
An overpriced business can sit on the market much longer, and sitting there is not harmless.
Buyers notice how long a business has been for sale. After a while, they stop asking, "Is this a good business?" and start asking, "Why hasn't anyone bought it?"
Eventually, the seller lowers the price. But by then, many of the best buyers have already seen the listing and passed on it.
You may end up selling for less than you would have if you had priced it correctly from the beginning.
Why A Stale Listing Is Harder To Sell
This is something many sellers do not expect.
If a business has been on the market for a year or longer, lowering the price does not completely solve the problem.
The listing is no longer fresh.
Buyers have seen it. Brokers have seen it. If the price has been reduced several times, people start wondering what is wrong with the business.
There may be absolutely nothing wrong with it. The original asking price may simply have been too high.
But now the seller has to overcome both the price issue and the perception that something must be wrong.
Fresh listings get attention.
Old listings require explanations.
That is one of the biggest costs of overpricing. It is not just the time you lose. It is the negotiating position you are in when you finally reduce the price.
What Buyers Are Actually Paying For
I understand why business owners sometimes have a higher value in mind.
They built the company. They took the risks. They worked long hours and made sacrifices to get it where it is today.
But a buyer is not paying for your blood, sweat, and tears.
They are primarily paying for the earnings the business produces and their confidence that those earnings will continue after you leave.
Sentimental value may be very real to you, but a buyer does not write a check for it.
That is not always an easy conversation to have. I would rather have it before your business goes on the market than nine months later when the listing is not getting offers.
Pricing Too Low Is Also A Mistake
You can also make a mistake in the other direction.
If a business is priced well below what it should be worth, some buyers become suspicious.
They start wondering whether there is a problem they have not discovered yet.
Of course, you can also leave a substantial amount of money on the table.
The goal is not to price your business high or low.
The goal is to price it at a number that can be supported by the financials and by what buyers are actually paying for similar businesses.
Why Some Brokers Agree To Your Price
Here is something business owners should understand before choosing a broker.
More than once, a seller has contacted me after another broker gave them a value that I could not come close to supporting.
Sometimes the broker simply wants the listing.
They tell the seller what the seller wants to hear, knowing there is a good chance the business will not sell at that price. A few months later, they start asking the seller to reduce it.
The seller pays for that strategy with time.
And time is the one thing you cannot get back.
That is why choosing your broker and determining the asking price should be treated as two separate decisions.
Choose the broker you trust. Then work together to determine a price based on the financials and the market.
Never choose a broker solely because they gave you the highest valuation.
Why Sellers Hire Me
I review the financials myself, line by line, which is a large part of what the Certified Business Intermediary credential covers. I do not outsource the valuation and I do not hand your financials to a junior associate.
I have turned down many listings because the seller and I could not agree on a reasonable asking price.
That is not because I am trying to be difficult.
A business that is priced at a number I cannot defend wastes your time and mine. It can also hurt the business's chances of selling later.
If your number and my number are far apart, it is better for both of us to know that before the business goes on the market.
Sometimes the best answer is to wait a year, make a few improvements to the business, and then sell.
I would rather tell you that than take a listing I believe is going to sit on the market.
Start With A Number You Can Defend
If you are thinking about selling your business, determining the right price is one of the most important decisions you will make.
It is also one of the easiest decisions to get wrong when you are emotionally and financially connected to the business.
I will review your financials and explain how I arrived at the value, so you can understand the reasoning behind the number.
The valuation is free, confidential, and there is no obligation.
You also do not have to be ready to sell today.
Many of the business owners I speak with are a year or more away from selling. In many cases, that is actually the best time to start the conversation.
You can also read what my clients have said about how the process went for them.
The Small Business Administration publishes a plain overview of the steps in selling a business, and the IRS treats the sale of a business as a sale of its individual assets, which is worth raising with your CPA.
This article is general information about selling a business in Arizona, not legal, tax, or financial advice. Valuation, tax, and contract questions depend on your specific situation. Talk to a qualified attorney or CPA before acting.