A debate has raged within the business brokerage industry ever since there has been a business brokerage industry about the proper approach to taking a listing. Let’s look at both sides of this issue and see what makes sense for you.
There are two main schools of thought on this; first, list everything you can, regardless of the price and terms. The second approach is to only take on engagements where businesses are priced at or near what you feel the true enterprise value is. Brokers subscribe to both philosophies and have been successful with either approach; however, there are specific rules you must follow to be successful with either approach.
Taking a listing on a business that is over priced by more than 20 to 25% of its value generally does not produce a high listing-to-sales ratio for the brokerage firm or individual agent. The reason is simple…human nature. Most brokers don’t “work on perfecting” that listing once they have it in their inventory.
Working to perfect a listing means exactly what it says. It requires the broker to “work” that overpriced business so that the owner will see the market is not accepting his/her asking price because it is outside the normal range of being reasonable.
Working the listing really begins when you take the engagement. You, as the listing broker, need to directly and clearly tell the owner what you think the business is worth and what “the market will bear” for their business. You don’t make the market; all you can do is share with him/her what the market will pay for that type and size business. Don’t leave the owner without making sure they understand that in your “expert opinion” the business is over-priced because it falls outside the economic boundaries of what the market conditions are. Unfortunately, too many brokers are so excited about getting a listing; they neglect to educate the seller on the realities of business values.
Then, tell the owner that after a short period of time (60 to 90 days) after you begin your marketing campaign on their business, if no serious buyer prospects are developed, or have requested the confidential business profile, or given a tour of the business, you will be back to meet with the owner to discuss reducing the price. Let him/her know this is not optional, that you will show them the marketing you have done and the lack of response you’ve received. Reinforce that you don’t make the market for the business value, but the market is clearly speaking about this business’ price.
This process may take more than one “price reduction meeting” with your seller before you finally get the business priced at a level that will garner serious interest from prospective buyers. You should tell the seller at the time of listing that sometimes if a business starts out way overpriced and remains on the market too long at the excessive price, it will become “stale” and no longer of much interest to the buyers in the market. This is another reason to start out with the business priced correctly from day one.
The key to successfully working an over-priced listing is communications with the seller. He/she must know the activities you are doing and the response, or lack of, you are experiencing on a weekly basis. You can’t take an overpriced listing and then 60 or 90 days later call the seller back for the first time and say it’s time to lower the price. The suggestion to lower the price should actually come from the seller. Why? Because they have hopefully seen how hard you’ve worked without positive results.
Perfecting the overpriced listing involves a lot of work and communication between you and the seller. If your human nature is to avoid this type of activity in your business brokerage career, then this listing method is probably not for you.
Holding to the philosophy of only taking on listings that are priced within 20% to 25% of their value requires you follow a different set of rules.
First, you must be willing to do a thorough job up front of evaluating the business’ financial statements and do the research to find comparable sales, to honestly and professionally show the owner what the business is really worth. Actually, you should do this for both approaches to listing a business so both you and the seller know the facts.
When you’ve explained how you arrived at the business’ true discretionary earnings or EBITDA, and then shown him/her the earnings multiple from sales of similar type/size businesses, you must be willing to hold firm to a price range at which you will accept the engagement. If outside financing is not a viable possibility, your pricing limits must also include seller financing.
This approach does not require quite the amount of “perfecting the listing” activities as the first approach does, however, the hard work and the “stick to your guns” mentality at the time of listing requires a willingness to “walk away” from the listing if the seller will not be reasonable with pricing the business.
We recently had a restaurant owner approach a VR Business Intermediary to sell his restaurant and strip shopping center in which the restaurant was located. A very lengthy and thorough analysis clearly showed the real estate was worth $650,000 and the restaurant at $300,000.
After the valuation came in at a $1 million suggested listing price, he very firmly said he would only sell for the $2 million price and then asked if the VR office wanted the listing at $2 million or not (he wanted $1.5 million for the property and $500,000 for the business); The answer was “NO”.
The business intermediary then put him on VR’s blog list and sent him information about activities at VR. In 6 months it will be interesting to see if any other business broker has any success – I suspect they will not.
So, which approach is the right one? That depends on you. Was it correct to walk away from a $2 million listing? What do you think? Finally, whichever method you prefer, be sure you have a motivated seller before you work on any listing.