When buying a business – forget the asking price, because it has nothing to do with the eventual purchase price. How Elan Capital can help.
There’s a popular saying regarding the asking price of a business for sale: “a business is overpriced the day it’s listed for sale.” Experience shows, there’s more truth than fiction to this statement.
The asking price has little to nothing to do with the purchase price. Good negotiating skills and creative deal-making is what gets a deal done! So, when looking at listings, don’t get discouraged by what they’re asking. After all, if you do this right, that’s most likely not what you’re going to be paying… right? Right?
Buying a Business – Forget the Asking Price
It’s easy to understand the seller’s desire to price a business higher than what the market will bear. Their is indeed, some valid reasons for this.
Fear of “Seller Financing”
When you buy a home, you generally put some money down and acquire a third party mortgage to finance the remainder. The home buyer typically does not finance the remainder of the payment. In the Business World, many business owners only get offers that involve seller financing. In a survey last year, BizBuySell reported that over 60% of businesses for sale included seller financing. With seller financing, you can attract more buyers and price the business higher because you are providing financing, which allows the buyer to pay for the business over a period of months or years.
Typically, most business owners shy away from this, setting the price high, but ready to settle for a much lower amount if it’s all cash. This is an area where using a broker like Elan Capital can help. We can match business buyers with appropriate financing so that business buyers may be able to approach the table without the owners help, lowering the asking price.
Emotional Attachment
Most sellers have an emotional attachment to their business. And for good reason, they have put years of blood, sweat and tears into building the business, many times from the ground up.
And the time has come to “let go”.
But business owners generally do not receive any professional input when establishing their selling price. They typically price the business based upon what they think it is “worth”, or what they “need” to get out of it, but this in no way reflects what the true value is.
Every seller wants to get the most money in his or her pocket from the sale. Again, here is the value of using an experienced business broker.
The challenge for a potential buyer is to combat these issues with factual information in order to acquire the business and achieve the greatest possible return.
Both buyers and sellers must realize that business valuations are very subjective. It’s an art, not a science. But both parties must also realize that appropriate formulas for that particular size and type business must be applied. Of equal importance is that both parties must recognize that it is only worth what a buyer is willing to pay and what a seller is willing to accept.
The difficulty, of course, is to come to a common dollar figure. having a broker negotiate this type of transaction is money well spent.
The Down Payment Negotiation
Again, business sellers usually have a fixed figure of what they want to walk away with in their pocket. That is why the down payment is often more important than the actual purchase price of the business, as many know they are likely to finance some of the sale. We have seen countless transactions on behalf of buyers when we’ve offered to meet the down payment requirements in exchange for a massive reduction in the total purchase price or have received incredible concessions on the balance of sale.
When addressing the initial asking price in any negotiation, ask the seller to outline how they arrived at their price. If you and your broker have done the research, you’ll be able to demonstrate an abundance of reasons why they may be asking too much. On the other hand, there are he highly motivated sellers, who price their business fairly. In these cases, work on getting other concessions in the deal in exchange for meeting their price.
Whenever you look at a business purchase, keep in mind that everything is negotiable, especially the price. Use it as a barometer for the seller’s thought process. Don’t allow the asking price of any business within striking distance be a deterrent to you. If it’s the right business for you, then solid negotiating skills can adjust any seller’s thinking.
Buying a Business – Forget the Asking Price
Lastly, there are times during every deal when there are “deal breaker” issues on the table. Try not to adopt a hard-line attitude and be sensitive to conditions that the seller classifies as “deal breakers”. When the seller wants to sell, and the buyer wants to buy, and the parties have built some trust with each other, any issue can be resolved.
Especially if a business broker with a cool head is within arm’s reach.
It is extremely important to find quality professionals that specialize in business transactions of the size and type you are considering. It is incumbent upon you to take the time to learn what is involved and how to successfully navigate your way to fully realizing your goals. And it starts by paying a fair price.