Should you state an asking price when marketing a business for sale?
There are a number of business brokers who encourage their seller clients to go with a “no asking price” strategy. Their stated rationale / theory for such an approach is two-fold: 1, by not stating an asking price, it may encourage highly motivated buyers to submit a better offer than a theoretical approach to value would suggest; and 2, what something is worth is what the market will bear so by letting the market set the price they claim a seller will get the price that they would end up with regardless of whether or not an asking price was stated.
Unfortunately, there are flaws with this “no asking price” rationale:
Buyers naturally tend to justify why something should sell for less, not more, just as Sellers naturally tend to justify why something should sell for more. The act of a buyer having to figure out what to offer and developing the rationalization for a lower price will help to solidify a buyer’s belief of the lower price, and absent compelling business valuation methodology that demonstrates a higher price, chance are the final price will be lower than if a realistic price was established and promoted up front.
The market for small businesses isn’t efficient. Each business is unique, there are a limited number of buyers and sellers, there are a limited number of business sales, there’s a low level of liquidity for a small business (you can’t decide to sell now and ten minutes later sell the business for cash as you would be able to do with liquid securities of publicly traded companies), and there isn’t complete and accurate publicly available information on the company being sold or other similar businesses that have sold or are being sold. Consequently, the inefficient small business “market” may not accurately price what is being sold.
Many prospective buyers won’t participate in evaluating a “no asking price” business. Many motivated buyers will ignore advertisements and marketing materials for businesses absent a stated asking price.
I suspect that there are more self-interested reasons that cause some business brokers to promote a “no asking price” strategy:
The risk is diminished of not getting a listing if a seller’s price expectations are higher than the broker believes he or she will be able to achieve. If a seller believes that their business is worth 8x EBITDA, and the business broker believes the business is likely worth closer to 3x EBITDA, it avoids having the business owner seek another business broker who may have a valuation expectation closer to their own.
Business brokers are paid on commission and only get paid if the business sells. Consequently, many business brokers would rather leave some money on the table but increase the likelihood of getting the deal done, then to achieve the best possible price and terms for their client.
It requires less up-front work and business valuation knowledge from the business broker.
Generally speaking, Codiligent business brokers believe that most sellers will achieve a better outcome by utilizing a stated asking price based on expert advice from a knowledgeable business broker or business appraiser. However, there are a few circumstances when a “no asking price” strategy may be more effective:
The business is distressed and is cash flow negative. A distressed business will likely struggle to attract significant buyer interest, and valuation will be subjective and/or based primarily on the value and marketability of the business’ discrete assets. Consequently, a “no asking price” strategy may generate more interest and may even result in a higher price than anticipated.
A business with less than a two-year operating history. For many profitable businesses that have less than a two-year operating history, the first year or two often have poorer financial performance than they will experience in the future. Traditional valuation techniques may value such a business lower than what a buyer would pay who sees strong potential growth and profitability based on early stage trends.
A business with very rapid growth and potential for significant scalability in a large or fast-growing industry, particularly in a hot economy. For example, a business may have had $1 million of cash flow last year, and had 100% growth for each of the prior two years. Perhaps there was an indication that it likely could have grown much more quickly if it would have had more access to capital. So, what is the appropriate way to value such a business? It can’t be based on past financial performance since this would significantly under-value the business. Projecting 100% growth next year may be too low particularly if the buyer brings access to more expansion capital or strategic marketing synergies. What type of growth rate can be realistically projected in year 2 post acquisition? What about year 5? A seller who has a business like this may find strong competition amongst buyers and a much higher price than a value that many business appraisers using traditional valuation techniques would estimate.