Pricing A Business Too High Is A Risky Strategy

by Dave Driscoll

Often, sellers want to go to market with very high prices for their businesses, hoping buyers will appreciate what the sellers perceive as great values. Sellers assume that buyers will at least take time to check out the businesses.

In reality, there are many qualified buyers who won’t even look at a company if they think the price is out of line with economic realities. Every business has a “reasonable value.” That value may increase if a buyer will gain strategically because of increased revenue and decreased operating expenses by integrating that particular new business into his or her own. The additional “premium” paid will be based on the value of those synergies the buyer will gain. However, even the additional strategic value is not going to result in a buyer paying an unreasonably high price for the business.

Woe is the seller who expects to find a sucker to buy his/her business for substantially more than it’s actually worth. It just doesn’t work that way.

When selling your business the objective is…? To sell the business! Plain and simple. Launching the business for sale with an unrealistic price will kill the initial enthusiasm and excitement usually created by a new offering. Pricing a business too high changes an opportunity to sell into an agonizing process of disappointment.  

After 60 to 90 days of fielding a few initial inquiries, providing additional financial information to sellers and hearing negative comments about the price of the business, the seller will typically get antsy and want to lower the price. But think about what has happened during that time period: Any initial interest/excitement has been lost, the seller has gotten anxious and the buyers have started to wonder:

• Does the seller really want to sell, or is he/she just fishing for a sucker?

• Did other potential buyers discover something about the business that caused them to pass on the opportunity?

• Why not wait longer for the price to drop more?

All the while, potential buyers who were initially interested may have found other opportunities and left the market entirely. The listing then drags on, and the longer the business stays on the market, the worse it looks for the seller. The seller’s growing anxiety prompts him/her to lower the price below the “reasonable” price that should have been the starting point. If there are still no viable bites, either the price is lowered yet again or the business is taken off the market. The phrase “damaged goods” comes to mind. Opportunity is lost, and a Life Beyond Business is postponed.

Pricing a business for sale should be approached scientifically, using valid processes, formulas and market-based information. Use metrics to price your business; don’t let emotion get in the way of sound logic. Buyers quickly recognize a “reasonable price” for a business based on the financials. Even sophisticated buyers who expect to negotiate business transactions will walk away without looking at a business priced too high.

Should a business be listed at a higher price to allow room to negotiate? Usually the answer is yes, within reason, but if the business is priced too high, there may be very few interested prospects and probably no offers.

Dave Driscoll is president of Metro Business Advisors, a mergers and acquisitions business broker, business valuation and exit/succession planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.