TRICKS OF THE TRADE: GETTING A PREMIUM PRICE FOR YOUR COMPANY, PART ONE
Small business owners are experts at running a company – their company, but they generally don’t have a lot of experience in selling one (or time for that matter). On the other hand, the buyer has probably done deals many times before! And when it comes to buying and selling a business, forewarned is forearmed!
If you want to get a premium price and a successfully closed transaction, it’s critical to get educated about the process. At Allegiance, there are four things we make sure every seller we represent understands before undertaking a sale process.
Here’s the first one:
Never Tell a Buyer Your “Asking Price”
Some sellers think that starting negotiations with a strong statement about their financial expectations will show they are assertive. The truth is, there is no upside to naming a figure at the beginning of this process. The reason is simple: it’s never going to be the right number. It’s always going to be either too high or too low.
A figure that’s too low turns on low-quality buyers who will try to “steal” the company. These buyers know you’ve undervalued your company, and they see that as a demonstrated lack of sophistication on your part. Additionally, they know they can negotiate an even lower number. A seller who gives a low asking price is just leaving money on the table.
A figure that’s too high turns off high-quality buyers. If the number is too high, sophisticated buyers won’t take you seriously. These buyers just walk away, usually for good – and they may have been the one who would give you the best deal. A low-quality buyer is only interested in getting the most for their money; a high-quality buyer is interested in understanding the seller’s priorities, making sure the cultures will be a good fit, and successfully closing a transaction that benefits both parties.
Sometimes, sellers think they can justify a high price by saying, “if they pay my price, I’ll sell.” Remember, buyers have gone through this process before. They know it’s a negotiation tactic, and that the seller ultimately would take less.
Finally, naming any number at the beginning of this process sets the maximum value you could receive. Even if your company is worth more to the right buyer, you just set an upper limit on your profits!