Poor Pricing Strategy, Seeking Suckers - VR Business Sales Blog

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Tuesday, November 6, 2018

Poor Pricing Strategy: Seeking Suckers

I help sellers go to market all the time, typically after we walk through a “Broker’s Opinion of Value,” but sometimes sellers have their own price in mind.

Going With The Gut

When sellers come to me and they have a price set I like to ask them how they got to their price. Normally it’s a combination of what they invested in their business, what they need to move on, and what they “feel” is right.

When it was time to sell my business a decade ago, I came from a similar mentality. I didn’t know what it was worth so I relied in part on a gut feeling to get to my price. I also asked some folks who had sold businesses like mine for advice, as well as some of my customers. Please trust me: asking customers how much you should sell your business for is not a sound pricing strategy!

Going With The Research

A decade later I know how to properly price a business. It took becoming a Certified Business Intermediary (CBI), an Accredited Business Intermediary (ABI), and a Most Valuable Intermediary (MVI) through hours of training and accreditation. I’ve also combed through hundreds of comparable data sets of sold businesses, and I can tell most business owners what the “Most Probable Sales Price,” or MPSP, of their business will be.

What this means for a seller is what a “good” deal would be. And this information is INCREDIBLY useful for people selling a business, because it should help them with their pricing strategy. More specifically, they can adjust their asking price based on how motivated they are to sell in context to the MPSP; lower than the MPSP if they are highly motivated, or higher than the MPSP if they have some time and want a premium for their business.

The Power of Knowing

Knowing what the most probable sales price enables sellers to go to market at a price that is below, at, or above their sales price. The research on selling a business indicates that businesses that go to market will sell for around 90% of their asking price, so my pricing strategy has sellers going to market at about 10-15% over the most probable sales price.

Why? Because everyone wants a deal, and nobody wants to leave money on the table.

Going to market with a slight premium for negotiation is a sound pricing strategy, but some sellers want far more.

They’ve seen the research, they know what their business is worth, but they insist on going to market at 30%, 50%, 100% or several times over what the most probable sales price will be.

Broker on Board

At a certain point I can’t take the journey with these sellers, as I’m just not confident that we could be successful in our journey to sell their businesses.

It’s important for sellers to know that the representation they hire believes in the price they are asking for the business.

Sounds obvious, but sometimes a broker will “take the listing” just to have it, knowing it’s over priced and that it may never sell; knowing that a buyer could buy just about any other business and make their money back far faster than if they bought the subject business. A broker representing a business like this will most likely share it with their business buyers last if at all, so it’s not fair to the seller to take the listing.

A broker’s listing agreement obligates the seller to pay a commission if the business sells, but it also obligates the broker to commit their best efforts to sell the business, so it’s unethical to take a listing if the broker won’t commit to representing it properly… The broker has to be fully “on board” with the listing including it’s pricing.

My Pricing Strategy for Sellers:

  • 100% or less of MPSP: Motivated Seller, Seller can’t wait to sell! 
  • 110-115% of MPSP: Recommended Listing Price: Priced with Room for Negotiation 
  • 115-130% of MPSP: Priced for a Premium, Seller understands it’s going to take longer to sell 
  • 130% or more of MPSP: Seeking Suckers, Seller is hoping to find someone who will overpay for the business! 
While the seeking sucker strategy is indeed a strategy for selling a business, it’s not a good one. Unless there is a strategic buyer or an unsophisticated buyer with more money than sense, chances are the seller and the broker are wasting a lot of time and effort in going to market.

Listen to the Market

The market approach is a simple yet consistent model that says “Based on similar sales before, people pay about this much for that.” The only thing that’s more accurate than the market approach is listening to what the market says. Take the business out to market and see what offers you get. Much like Shakira’s hips, the market doesn’t lie.

A Cautionary Tale

Recently I had a listing that the seller wanted $100K for, I told them they’d be lucky to get $30K and suggested we compromise at $50K. We settled at $75K and went to market. I received offers from $20K to $25K (after more than 60 people looked at the business). Clearly, the market was telling me and the seller that we were both too high! The seller refused the low offers, the business never sold, and I shouldn’t have taken the listing. As of the writing of this article, that business has not sold the the owners are suffering to move on from a failing business.

Conserve the Pepto-Bismol

Don’t use the “seeking suckers” strategy, listen to what the market is telling you, and try to separate your feelings and sunk costs from the pricing of your business. You will be saving yourself and your broker a lot of stomach aches!
About the Author:

Neal Isaacs Neal Isaacs sells other people's businesses and blogs about building value in businesses. He's a Certified Business Intermediary (CBI), an Accredited Business Intermediary (ABI), a Board Member of the CVBBA & Better Business Bureau of Eastern NC. You can connect with him at @Neal_Isaacs, and his firm at @VRbizTriangle on Twitter or Facebook.

VR Business Brokers Has Sold More Businesses In The World Than Anyone ® and VR Business Brokers in Raleigh, NC has deals dating back to the 80's right here in the NC Triangle market.


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