In an uncertain economy, selling a business can be a challenging endeavor. One critical factor that can significantly impact the sale process is the pricing strategy.
Overpricing a business in the hopes of the numbers “catching up” with the asking price may seem tempting, but it can lead to adverse outcomes.
The following are the potential negative consequences to consider and the importance of setting a realistic and competitive price.
1) Prolonged Time on the Market
Most buyers, especially in times of economic uncertainty, are cautious and diligent in their investment decisions. If a business is priced too high, it quickly becomes less attractive and good potential buyers that may have been interested will pass it by. This loss of buyer interest can significantly limit the pool of potential buyers. With a short supply of quality businesses available in today’s market, the perception that the business is overpriced can become entrenched, further deterring potential buyers and extending the time to the closing table.
2) Negative Market Perception
Buyers may perceive an inflated price as a sign of desperation or financial instability, leading to unforeseen doubts about the business. This negative perception can spread among other potential buyers and industry professionals, making it harder to attract serious offers and damaging the business’s overall reputation. In an uncertain economy, maintaining a positive market perception is crucial to instill confidence in the stability of the business.
3) Stagnated Growth
When a business is priced too high, buyers may expect correspondingly higher returns on their investment. If the business fails to deliver the projected growth and profitability, it can lead to dissatisfaction and potential legal repercussions. Additionally, an overpriced business may struggle to meet debt service coverage and secure the necessary financing for growth initiatives. This further hinders its performance and reduces its attractiveness to buyers.
4) Opportunity Costs
In an uncertain economy, timing is crucial. Overpricing a business for sale can result in inherent opportunity costs. While waiting for an unrealistic price, other businesses in the same industry may seize opportunities, adapt to market conditions, and gain a competitive edge. By the time the overpriced business adjusts its pricing strategy, it may find itself playing catch-up, lagging behind competitors, and potentially losing market share.
Create a Strategy that Works for Your Business
Our firm’s strategy is to maximize the overall value to the seller. While there are many factors to consider in the pricing strategy, we strive to align this strategy with the unique needs of our clients. In many cases, instead of setting an asking price we often use the strategy of “purchase price to be suggested” to help account for some of the unique situations in the business. These may include pending new business contracts, a significantly high increase in sales/profitability, or desire to focus on specific industry/strategic buyers. While this strategy often takes more effort, it also proves to be the best approach to maximize the business value while properly addressing the intangible aspects of the transactions that are most often overlooked.
The majority of our business comes from referrals, and we appreciate your continued trust in our firm.
Robert W. Amerine
President, CBI, M&AMI
