There’s an old cliché adage in the sales world of “the first offer is usually the best offer.” We wanted to address that idea here and talk about how it translates to business sales. It’s something that most sellers will absolutely hear when selling their home and yes, even a business. Let’s dive into the psychology of this cliché saying and dissect why so many professionals in sales believe it to be true (most of the time). We at Green & Co. have been an integral part of hundreds of transactions throughout our careers. While there are exceptions to this “rule” and not every first offer is the best one for a seller to accept, the majority of the time it does prove to be true. Let us explain why…
You Might Never Catch Another Fish
Since I’m a boater, I always hear people talking about their fishing trips. Time and time again, I hear stories where they caught a fish quite early into their trip and then expected it to be a whole day of just pulling them into the boat one after another. More often than not, the story doesn’t end that way, and that first fish is the only one they get to take home. When I hear those stories, I always think about how that relates to business sales.
In a traditional market for small business sales, most of the time we feel very lucky when we are able to present an offer to a seller. 75% of business listings on the market never ever sell. That’s why we do our very best at Green & Co. to only take on business listings that we believe will sell. We put thousands of dollars into marketing and our brokers work hundreds of hours on each listing for free. They don’t get paid until it sells, so they want to make sure that they are betting on a horse that they think has a chance of winning. So, after all the work we’ve done to market, advertise, screen potential buyers, get buyers excited about the opportunity, and hold a buyer/seller meeting, when we finally get the chance to write up and present an offer to a seller, we know how much it takes to get to that one offer.
Sometimes if that first offer comes too quickly after being listed, a seller can be “spooked” and think that they priced the business too low or that they should hold out for a better offer to come along. That is such a dangerous situation, because experience and market data tells us that most businesses are extremely lucky to get one offer. There is certainly no guarantee, and actually the odds are not in our favor that more offers will come along in the future. So, we as business brokers will urge our sellers to take their first offer very seriously and try to see if they can make it work. It is usually, but definitely not always, their best chance to get their business sold. Just because we catch a fish right away, doesn’t mean that we will keep pulling them into the boat as time goes on.
Time on Market
As a general rule, the longer a business sits on the market, the less desirable it becomes, and it loses perceived value to the pool of potential buyers keeping tabs on the market. They might have seen a few price reductions and are waiting for the seller to become “more motivated.” With that being said, the average business sale takes about 9-10 months, and under normal market conditions, the “magic” time for finding the right buyer doesn’t usually come until after it’s been on the market for over 6 months. The average statistics are why it’s so important to get the business priced right from the very beginning. If the business listing is priced according to the market’s comparable sales, then don’t be surprised to see an offer come in during the first few months of being on the market. That’s really the ideal situation that we like to see. If a seller gets an offer in the first few months, but they reject it to wait for better offers, if months pass and no other offers come in, experience tells us that that the next offer that we do get (if we even get another offer), probably won’t be as favorable as the first one.
In business sales, we typically don’t have enough good listings on the market at any given time to offer to potential buyers. Those ready, willing, and able buyers end up just watching the market and waiting for something desirable in their target geographical area or industry to become available. So, if a buyer comes in relatively quickly after the business has been listed, then they are most likely one of those “eager buyers” who have been waiting patiently and watching the market for the right listing to pop up on their radar. If they are truly a serious buyer, then their offer should reflect that, and even if it is a lower offer than you were expecting, all hope is not lost. That is just their opening offer, and if they really want the business, then chances are that there is room to negotiate them up a little bit. Your first offer is generally going to come from an enthusiastic buyer who really wants to buy it. It doesn’t mean that there won’t be other good buyers out there, but the buyer that gets in first might have been shopping for a while or might have lost out on another business opportunity, so they will come in quickly with their offer.
What if the First Offer is Terrible?
If the first offer that comes in is super low or the terms are not desirable, then we urge sellers not to reject the offer outright. As we explained above, business sellers are lucky to receive an offer on their business. So many businesses on the market will never ever get one, and that is unfortunate. So, if you are one of the lucky ones, really take it seriously, and work with your business broker to come up with a sensible counteroffer to fire back at them. Analyze the comparable sales that your business broker used to give you their original opinion of value and maybe ask them if there are any new comparison sales for it. How does the price on the offer compare to the similar businesses that have sold? If it is in line with them, you might want to consider a more realistic counteroffer. If it is much lower than the market data, and it’s early in your listing period, and there is a lot of buyer interest, then it’s the perfect time to stick to your guns when it comes to price.
As with any offer situation, it all depends on the circumstances, the context, and the unique factors involved. If you and the buyer are too far apart and are unable to come to a meeting of minds, and all signs point to moving on from this buyer, then the right thing to do is to wait for a better offer to come along. Of course, there is no guarantee that it will, but that is definitely the risk you take if you are going to walk away from your very first offer.