The asking price is the number most owners care most about, and for good reason. That number will fund their retirement, make it possible to start another venture, or move on to another phase of life. The number has to meet the owner’s needs, or the time to sell might not be right. But that doesn’t mean the listing price is based exclusively on the owner’s needs. Here’s what a seller needs to understand about pricing.
Lenders, especially those working with the SBA, will appraise the business. They’ll look at three important factors: the company’s ability to meet its obligations to continue operations, sufficient cash flow to service the debt of the business loan, and its ability after that to pay its owner a reasonable salary. Lenders won’t fund a deal if the company’s cash flow can’t meet all three criteria.
Some sellers argue that cash buyers like PE firms have a history of paying more for acquisitions and won’t depend on SBA funding. That’s true, but they also look at the same factors as a traditional lender, and they expect a Return on Investment within a specific timeframe, usually three to five years. They will walk away from a deal that doesn’t make their own numbers work.
Some owners will still insist on pricing their company to meet their needs instead of pricing it to sell. Here’s what happens when that comes up.
First, many brokers won’t take the listing – I wouldn’t. I’m in the business of selling companies, not just listing them.
Buyers who take on diligence may spend weeks or months investigating the financials, only to find out after all that work that the company is not worth the asking price. They will have wasted your time, their time, their accountant’s and lawyer’s time, and your broker’s time, making for a lot of unhappy parties to the deal. They may decide to make a lowball offer, but that doesn’t get you any closer to your goal. If you decide to start dropping the listing price, buyers will assume there’s something wrong with the company – and there is; it’s not profitable enough to merit an offer at its current price.
That leaves buyers who aren’t serious or savvy enough to realize the company is overpriced. Even if the seller holds a sizeable note, their ability to get financing, be profitable, and even keep the business operating are severely reduced. In the end, you may never get the full asking price of your company, and you may wind up having to take it back and keep running it.
If you’re serious about selling, you should be equally serious about how you price it for the market.
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