Just like the real estate market, the business sales market is booming. It is a seller’s market, with the number of buyers far outweighing the number of good businesses available on the market for purchase. We have the buyers, but we just don’t have enough good-quality business listings to offer to them. So, when a great business comes on the market that is priced correctly, buyers want to jump on it immediately.
It’s important to note that this is definitely not the norm in business sales. It’s very different from real estate where there will be a bunch of interest and multiple tours in the first few weeks. Often what we see in business sales is that buyer interest is very slow and sporadic, and in many cases, there is only ever one buyer who expresses interest in moving forward with making an offer and purchasing the business. Furthermore, the average days on market for a business are above 280 days in a normal balanced market, so historically business sales move much slower than you would expect.
Early Buyer Interest
For a seller, getting a lot of buyer interest or a great offer on their business in the first few weeks of being on the market can sometimes “spook” a seller into believing that they priced their business too low or that they should hold out for a better offer. This response is understandable, because admittedly we would all probably have the same initial reaction; however, there is no guarantee that this won’t be the one and only offer they get. We’ve seen it happen time and time again, and most often, if those early buyer interests don’t make an offer and move forward with that purchase, then we typically see the business sit on the market for another 6-8 months before the right buyer comes along.
Construction Company Example
We were selling a large construction company and we had two buyer/seller meeting requests in the first few weeks of the business being on the market. This was a “hot” listing with buyers and we had many inquiries on it. The seller became worried that we priced it too low and wanted to raise the asking price. After going through the recast again, looking at the comparable sales and the industry multiple once more, the seller concluded that it probably was priced right, and we left it as is. The buyer inquiries started to slow down, and then became a trickle. The two buyers who had meetings with the seller early on had disappeared and were no longer interested. After about 6 months on the market, we did a price reduction, and still did not secure a buyer. It was a great business at a good price, so we knew it would eventually sell, and experience told us that we needed to just be patient. It was only a matter of time before the right buyer came along. In month number 9 we found the perfect buyer and we closed on the business two months later. The moral of the story is that sometimes early buyer interest can make you question your asking price, but before you ask your business broker to raise it, go through the numbers again with your business broker. They should be able to take another look at your financial recast, pull comparable sales again, and look at multiples and ratios to make sure you know what market value of your business should be. If it’s right on the money, then we suggest leaving it or only bumping it up just a tiny bit more to add some extra padding for negotiation. A drastic raise in asking price will most likely halt the current wave of buyer inquiries, and if we are getting good exposure and lots of interest, slowing it down is really the last thing we want to do.
What to Expect in Today’s Market
So, our message to our sellers right now is this: if we’ve priced your business right, then expect to have lots of buyer interest and possibly offers quickly. It means that we’ve come to an asking price that buyers can see value in and that we’ve marketed the business well. It doesn’t necessarily mean that it is underpriced or that we should immediately raise the asking price. Sellers also need to keep in mind that the majority of businesses are sold using SBA financing, and banks will only lend on the value that is provable by the numbers the business is showing on their books, so if a business is grossly overpriced, a buyer will not be able to borrow based on that purchase price. That will eliminate 60-70% of the buyers out there and severely hinder your chances of even selling your business. What early interest or offers means is that your business stands out to the multitudes of buyers currently in the marketplace who are eagerly awaiting new listings to pop up. Don’t get spooked, but do voice your concerns to your business broker, so you both can look at the recast and valuation once more, just to make sure the price is right.
Can I Raise the Asking Price?
At the end of the day, it’s your business and you need to be comfortable with the asking price. However, please understand that from your business broker’s point of view, we’ve done hours and hours of hard work to value it for you, and we’ve come to the most likely selling price based on real numbers and actual sold data. Could we be wrong, could you get more money for your business? Sure, it’s possible, but not very likely if we’ve done a thorough job on the valuation. If you want to list your business a great deal higher than what your business broker is suggesting, then experience tells us that it will have a more difficult time selling. At Green & Co, we spend thousands of dollars to get a business listed and marketed, so we are investing real money in your listing, taking on all the risk, and working hard to get it sold. The more we deviate from the asking price that we truly believe is the right one, the more we decrease our chances of being able to sell it for you. So, if we raise the asking price at your request, and then we go months on end with no offers in sight or the buyer interest in the listing dries up, then please be open to a discussion with us about lowering the price back down to the original asking price that we had suggested and extending the length of the listing out a bit, so that we have a chance to sell it at the corrected price. The market will tell us if we’ve got the price right, and we will know that by the number of interested buyers who are ready to make an offer and commit to the purchase.