17 Apr Get the Price Right When Selling Your Business
IBBA Canada is a Chapter of the International Business Brokers Association (IBBA), an association for the professional practice of Business Brokers and Intermediaries
Proper pricing is a must when you go to sell your business. And that means an asking price that is reasonable and correct.
A reasonable asking price should factor the true earnings of the business and what the market is willing to pay. Business patterns, systems, competition, markets, quality of service or product, staff and operational factors are all predictors of future earnings that need to be taken into account.
And in Canada, as in the U.S., businesses with reasonable asking prices are selling. (TWEET THIS)
“It’s a great time to sell because of the strong market. And these results go to show that if a business is priced correctly, it’s getting sold,” explained Michael Camerota, M&AMI, CBI Touchstone Advisors, in the Q4 2015 Market Pulse Survey.*
He continues: “What we don’t know is how many businesses haven’t sold because they were listed over a realistic benchmark. If you work with the right business broker, they will have the tools and resources to price your business correctly.”
I couldn’t agree with him more.
Our brokers do a quality job of assisting business owners to properly value and price their business. They also know how to find and work with buyers.
But issues arise when business owners have unrealistic ideas of what their business and its market is worth. And by sticking with thesefaulty expectations they end up wrecking the sale of their business.
Sometimes these faulty expectations are perpetuated by others.
Unethical or untrained “brokers” hurt both sellers and buyers
Advisor Dave Barnett touched on the issue of unethical or untrained “brokers” recently in his blog post Why asking price is critical when selling your business.
Dave described a scenario where he would tell a business owner that considering all the relative factors and comparable business sales their business would likely sell for $275K. But the owner doesn’t want to settle for less than $500K because that’s what their financial planner says they need to retire.
Dave goes on to say that “some business brokers would say to the person, ‘OK, you want $500 thousand let’s ask $550.’ Now it’s a business worth $275 and it has an asking price of $550.”
When you overprice a business, asking more than the cash flow will support given the risk profile of the industry, you miss out on meeting what Dave calls the Reasonable Buyers.
A reasonable buyer will not pay double what a business is worth. “What ends up happening is they won’t even go near that ‘seller who’s got the crazy over-inflated price,’” says Dave.
Instead, any response they get will come from an “unreasonable buyer… someone who goes into the market and simply bids low on everything hoping to find a desperate seller.”
I asked Dave who he was referring to when he identified “brokers” who misprice. Dave assured us that it wasn’t our trained Sunbelt brokers.
“I got my start at Sunbelt and you’re certainly right about the training offered. It’s why I generally send people there when asked for a recommendation on a good business broker. The problem of ‘bad brokers’ is huge. I know of several in my local area. Realtors, accountants, lawyers, retired bankers, engineers, MBA graduates just to name a few. All of them representing themselves as business brokers and trying to sell businesses and charging commissions.”
We agree with Dave that realtors or unethical or untrained people who pass themselves off as business brokers often misprice businesses and do a disservice to both sellers and potential buyers.
“If you’re thinking about selling a business, you need the price to be right,” he concludes. “So that you can have that intelligent conversation with a potential reasonable buyer that comes along. Hopefully, it’s reasonable buyer with money and purpose and motivation and desire.”
And repeating what Michael Camerota says, “If you work with the right business broker, they will have the tools and resources to price your business correctly.”
Want to know the most probable selling price for your business? Contact us for a free consultation.
*This survey is presented by the IBBA, the M&A Source, with the support of the Pepperdine Private Capital Markets Project and the Pepperdine University Graziadio School of Business and Management.