Business Pricing Strategy: Getting the price just right.

Like they said it best in the Goldilocks and the Three Bears: Not too hot, not too cold, just right.  To maximize return, today’s business owners should take the same advice when pricing their businesses… Not too high, not too low, just right.

Not too high:  Many sellers try to price their business too high.  They often feel that “I can always come down later.”, that they may need for some “negotiation” room, or that they should at least “test the market”.  They also price too high because they are using pricing formulas that are outdated or not relevant. Perhaps they succumb to this because of wishful thinking or other factors not pertinent to the market.

I’ve seen sellers set a price, and over time reduce it a little, and then after more time price it lower again and again.  Unfortunately by that time, the market had declined, and they had “chased the market” but never hit it.  If priced appropriately, perhaps it would have sold at a value higher than the current asking price.  Businesses, like property, become show-worn over time.  Purchasers ask, “How long has this been on the market?”  You know that they are thinking that a long time on the market equates to an over-priced opportunity.  This does two things, either buyers just decide to pass, or present a low offer.  Neither maximizes the best value for the seller.

 

Not too low: Business people are decision makers.  Once they decide they want to sell, they are all in.  They set a price based on their needs, offer it up to anyone they think might be interested, and sometimes strike a quick deal.  In the process, they might have left valuable goodwill on the table. Or perhaps they did not take advantage of a possible strategic acquisition, or even fully expose it to all the potential buyers in the market.  Either way, the hard earned equity they built up over the years may not be realized.  Sure, they have the illusion that that they saved a brokerage commission, but at what expense?

Just Right: The market, is the market, is the market. People seem to understand this in the stock market.  Shares selling today at $15.39 are only worth $15.39 today.  If you want to sell today for $ $23.50, do you really think it’s a wise strategy to offer your shares at $23.50-  hoping someone will come along, or that you will get your a price much higher than $15.39?   Do you think you have left “negotiation room” at $23.50, or that “testing the market” might produce different results?   The gap is too big, and people today are paying $15.39 period.  Or, as I like to say: The market, is the market, is the market.  It’s best to price a business so that buyers don’t dismiss it immediately.  Purchasers often look at a business offering and try to understand if the numbers “work”. If the numbers do work, you have a chance of attracting competitive offers and having many parties interested- not just ones that can grind down the price.

So, how do you price it “just right”?  I’d think contacting someone in the field of business brokerage might be a good first start.  Someone that knows how to balance the meeting of seller needs against buyer needs.  That is where price settles out!

Perhaps as in the example above, your needs and the market don’t match.  Working with a business broker who can assist you in identifying what targets need to be reached so you can achieve your desired price through a carefully thought out exit plan might make some sense.

At Magnusson Balfour Commercial & Business Brokers, we can help you with business valuations, exit plans, loan packaging, selling, and marketing- as a total package, or à la carte.