May 4, 2015
The process of buying or selling a business requires dedicated attention, and to market and facilitate the sale of a business is a full time job. A business owner has expertise in running their business, and running the business is also a full time job. Hence, the business owner has the need to sell the business, and the intermediary provides the time and resources to accomplish the sale.
A qualified business transfer specialist saves business owners time and money by helping them avoid costly mistakes. Professional intermediaries market the appeal of the seller’s business, and maximize the exposure of the business to qualified buyers, all within the parameters established by the business owner, including confidentiality. And more importantly, what is a good price for my business?
Both the business owner and the intermediary are motivated to obtain the best possible price that a reasonable and responsive buyer will pay because both the owner and the intermediary have a vested interest in the sale. When establishing the price of the business, consider two factors as critical — price and terms.
Of businesses priced at $100,000 or more, over eighty percent have down payment terms of one-third or less, and the owner finances the balance. Increasing the down payment to one-half can reduce the selling price by twenty percent. Terms that require a cash sale can reduce the price by forty-sixty percent more (of the one third down purchase price).
Generally, a buyer attempts to acquire as much business as possible for their available cash. For example, when a seller’s terms require $400,000 down on a business valued at $800,000, a buyer may keep looking for the business valued at $1,200,000 with terms of $400,000 down and seller financing on the balance. Disregarding other factors, high percentage down payments generally cause buyers to discount offers.
Terms are significant when pricing and selling a business. The business owner asking for an all cash sale will probably have difficulty selling because buyers generally know they can buy up to three times as much business for the same money down (investment).
Competition influences price and terms. Competition among buyers can create higher selling prices. When a business is overpriced or the owner offers unreasonable terms, few buyers, if any, will have an interest in acquiring that business. Conversely, when a business is priced realistically with reasonable terms, more buyers are likely to pursue an acquisition of the business.
Finally, buyers know something about their market. The buyer who believes other buyers are competing for the business will be highly motivated to offer the asking price to avoid losing the business to another buyer’s offer.