Should you lower the asking price?
Whether you’re selling a car, a house, or a business, it’d only make sense that you’d want to sell for the highest price possible. However, when it comes to selling a business, asking for the highest possible price doesn’t necessarily mean more. There are many variables when it comes to determining the valuation of a business and even unexpected and unforeseeable variables when it comes to selling a business. Some of these variables are not within our control, nor is it something we can factor out when it comes to selling businesses. Some of the things a seller controls when selling their businesses are the asking price, the timing, and how they choose to sell their business.
Some of the most common variables when determining a business valuation for the purpose of selling are the profitability of the business, assets, the sector the company is in, owners’ hours, etc. Those are variables associated directly with the business, but some variables affect the valuation and the purchase price of the company that is not directly tied to the business itself. According to recent Market Pulse reports (a quarterly survey of market conditions for businesses sold in Main Street and the lower middle market by the IBBA and M&A Source), macro events have brought certain variables into the spotlight affecting business Purchase Prices.
- Labor Shortages
- Supply Chain Disruption
- Interest Rates
If we look at the charts below, we can see how these variables, such as inflation and interest rates, have affected purchase prices for businesses, which will factor into business valuations as markets adjust.
(Above is a data chart of CPI provided by the U.S. Bureau of Labor Statistics)
(Graph of fed interest rate from Oct 1st, 2021 – Sep 1st, 2022)
These variables can have a ripple effect as buyers, sellers, and advisors must adapt to the changing market conditions. As these variables impact a business’s profitability and the sellers’ net income, the businesses’ valuation and the purchase price will be adjusted accordingly, thus changing median multiples across the market.
We can see how much of a difference there was when comparing Q2 of 2021 and Q2 of 2022. It’s important to note that these multiples are median, and the multiple will vary depending on the industry. After reviewing these charts, we can see how these variables affect business purchase prices. As inflation started rising, it started eating into business profitability and SDE, followed by the fed trying to tame inflation, thus raising interest rates and pushing out once-qualified buyers from the market. As shown in the chart above, business owners who sold their businesses in Q2 of 2021 received a higher price than those who waited to sell for a higher price. On the other hand, business owners that had listed their businesses on the market declined an offer for lower than the asking price and waited for the total asking price to sell for lower than the offer they received previously as the buyer pool and market multiples has shrunk.
So, lower the price?
Although price can and will play a significant role in anything you sell, especially for businesses, you don’t want to leave any money on the table either. Although inflation has caused interest rates to rise and the median in market multiples to shrink, it doesn’t mean you need to lower the asking price immediately. Current events such as labor shortages, supply chain issues, and rising costs have caused buyers to search for “recession-proof” businesses. Depending on the industry and market sector the company is in, the demand from buyers is much higher and is not affected as much or at all, even though the cost of borrowing and market multiples have shifted.
As you can see in the chart above, the top-selling businesses in the market sector of $500k or below were restaurants, while business services were the top sellers in the market sectors from $500k to $2 Million. Finding the correct asking price can be tricky as many variables are involved. Having a reputable business broker and M&A Advisor like V-AID Business Investments assist when selling your business can help determine the valuation of your business and get the best results when it comes to selling your business.
Since 2001, V-AID Business Investment, a team of resilient business brokers and M&A advisors in Dallas, TX, has been specializing in selling small to mid-size businesses in the main street to the lower middle market. V-AID’s experienced team of experts has a proven strategy that will ensure strict confidentiality, a streamlined selling process, and the maximum value for the business. With deep expertise accumulated from hundreds of done deals, V-AID delivers superior results by providing clients with strategic planning and creative solutions tailored to each transaction. Combining V-AID’s proprietary database of buyer networks and industry-leading marketing, V-AID offers a proven selling method that has been the solution to a value-added exit for hundreds of business owners with a completion of 585 transactions totaling over 124 Million Dollars and continuing.
10 Questions Everyone Should Ask Before Signing on the Dotted Line
Before buying any business, a seller must ask questions, lots of questions. If there is ever a time where one should not be shy, it is when buying a business. In a recent article from Entrepreneur magazine entitled, “10 Questions You Must Ask Before Buying a Business”, author Jan Porter explores 10 of the single most important questions prospective buyers should be asking before signing on the dotted line. She points out to remember that “there are no stupid questions.”
The first question highlighted in this article is “What are your biggest challenges right now?” The fact is this is one of the single most prudent questions one could ask. If you want to reduce potential surprises, then ask this question.
“What would you have done differently?” is another question that can lead to great insights. Every business owner should be an expert regarding his or her own business. It only makes sense to tap into that expertise when one has the opportunity. The answers to this question may also illuminate areas of potential growth.
How a seller arrives at his or her asking price can reveal a great deal. Having to defend and outline why a business is worth a given price is a great way to determine whether or not the asking price is fair. In other words, a seller should be able to clearly defend the financials.
Porter’s fourth question is, “If you can’t sell, what will you do instead?” The answer to this question can give you insight into just how much bargaining power you may have.
A business’ financials couldn’t be any more important and will play a key role during due diligence. The question, “How will you document the financials of the business?” is key and should be asked and answered very early in the process. A clear paper trail is essential.
Buying a business isn’t all about the business or its owner. At first glance, this may sound like a strange statement, but the simple fact is that a business has to be a good fit for its buyer. That is why, Porter’s recommended question, “What skills or qualities do I need to run this business effectively?” couldn’t be any more important. A prospective buyer must be a good fit for a business or otherwise failure could result.
Now, here is a big question: “Do you have any past, pending or potential lawsuits?” Knowing whether or not you could be buying future headaches is clearly of enormous importance.
Porter believes that other key questions include: “How well documented are the procedures of the business?” and “How much does your business depend on a key customer or vendor?” as well as “What will employees do after the sale?”
When it comes to buying a business, questions are your friend. The more questions you ask, the more information you’ll have. The author quotes an experienced business owner who noted, “The more questions you ask, the less risk there will be.”
Business brokers are experts at knowing what kinds of questions to ask and when to ask them. This will help you obtain the right information so that you can ultimately make the best possible decision.
Copyright: Business Brokerage Press, Inc.