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How Important Is the Asking Price?
The answer to that question depends on who you are asking. If you're the seller, you might say that the asking price is too low. The buyer would say 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. This figure could be based on their knowledge of the industry and what similar businesses have sold for. It may, however, just be based on a wish.
There is the old, but true, story of two partners who decided to sell their business. When asked what the price should 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. They fail to realize that an unrealistic price keeps buyers from even looking at the business. Buyers know that they can make a lower offer, but if the starting point is too high compared to what the buyer considers to be a fair price, he or she will likely question, "Why bother even making an offer?"
Studies using various databases 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 that sold for $1 million or more sold for about 90 percent of the asking price, while smaller ones sold for about 85 percent of the asking price. The important thing to remember is that the data are based on sold businesses only. There are no data, of course, comparing the businesses that didn't sell.
Sellers have to remember that starting with too high of an asking price may well prevent a very qualified buyer from even looking at the business. You may know your price is too high and that you will come down, perhaps even significantly, but the buyer doesn't know that.
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 final 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 his or her business.
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