Murphy Sell my Business Russel Cohen

Russel Cohen

Russel Cohen

Russell Cohen

Russell Cohen
How Important Is The Asking Price?


How Important Is The Asking Price?
May 2015

Depends on whom you are asking. If you’re the seller, you might say that the
asking price is too low. The buyer would say, obviously, that the asking price
is too high. How can they both be right? Who decides?

Most sellers have an idea of what they want for their business. It can be
based on their knowledge of the industry and what similar businesses have sold
for. It may be, however, based on just a wish. There is the old, but true,
story of the two partners who decided to sell their business. When asked what
the price would be, they both responded with the same answer – $2 million.
When asked how they arrived at that price, they each said that they wanted
to be a millionaire and two times $1 million was $2 million.

Sellers often say that the asking price doesn’t make any difference since
it can always be reduced. What they don’t realize is that if the price is not
realistic, buyers won’t even look at it. Buyers are aware that they can make
an offer, but if the starting point is too high, what they consider a fair
price may be so low that why bother even making the offer.

Studies using various data bases comparing actual selling prices of businesses
with their asking prices show that the difference is about 15 percent for small
businesses. The larger the business, the smaller the spread. Businesses sold
for $1 million-plus sell for about 90 percent of the asking price, while smaller
ones sell for about 85 percent of the asking price. The important thing to
remember is that the data is based on sold businesses only. There is no data,
obviously, comparing the businesses that didn’t sell.

Sellers have to keep in mind that starting with too high an asking price may
well prevent a very qualified buyer from even looking at the business. You
know your price is too high and that you will come down, perhaps even significantly,
but the buyer doesn’t. What is the right price? A business broker professional
has tools to help sellers arrive at a reasonable starting point. There may
be comparable market data based on similar sales. There are methods based on
the cash flow of the business and a multiple using other business factors such
as location, down payment requirements, competition, annual sales variations
and other determinants.

Ultimately it’s the marketplace that decides the ultimate selling price. Serious
sellers listen to the marketplace. After all, if 10 buyers are willing to pay
X for the business and there are no other buyers, the price is X. The seller
doesn’t have to accept that price, but he or she must accept the fact that
the market will only pay X for their business.

Since studies of thousands of business sales show that the sales price ends
up being, on average, 85 percent of the asking price – so sellers shouldn’t
dream or wish for too much.

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