A Word About “Asking” Prices

A Word About “Asking” Prices

Comment from Tom:

In reviewing some old email, I came across the following. I still like it. It mentioned one thing, in particular, that caught my eye.

In preparing for several talks I recently gave, I had to review some old – and also some current data. The years I had information for were: 1978, 1992 and 2011. In the article that follows, Jack mentions that the offer came in at 84% of the asking price. What I discovered in my research – all based on solid data – was that the average percent of the seller’s asking price that the business finally sold for was as follows:

  • 1978 – 84%,
  • 1992 – 84%,
  • 2011 – 84%

In addition, guess what the figure was for 2011 from BizBuySell for the many busineses sold via that site?  You guessed it – the average selling price was 84% of the seller’s asking price.

A word about “asking” prices

Recently we received an offer on a business we were representing, which was considerably under the listing price. Upon being asked how the buyer came up with the offering price the buyer responded, “ Most asking prices are just that, and not an absolute unmovable price. Therefore, if they take the amount that I offered, then that helps me be in a better position with the business.” This offer happened to be 84% of the asking price and 1.3 times what the business made the previous year. Additionally the buyer was asking the seller to finance one-half the price offered! Such an offer can be called a “lowball offer”. We were embarrassed to present such an offer but we are obligated to present any and all offers, which we did. Of course the offer was turned down flat and this business sold at the full asking price the following week. The selling price was exactly 2.2 times the annual profit.

This incident prompted this word about “asking prices”.

Buying a business is nothing like buying a house or a car with the haggling and back in forth that goes on in these kinds of transactions. Sellers all know and understand standard formulas and rules of thumb that are used to value a business and these formulas are based on net profit of the business. Some buyers loose out on the chance to own a wonderful business because they approach a purchase like they were at a garage sale buying some trinket for cents on the dollar and it’s time to bargain!

For the past 12 years, Muradian’s business sales have averaged 97%% of the listed price and two-thirds of all sales have been 100% of the full listed price. Most of the sales that were under 100% were lower due to less inventory value on hand after taking a physical inventory so adjustments are made.

The Business Broker Newsletter analyzed 7,645 transactions to learn that the average selling price nationally was 85.6% of the asking price vs. 97% for Muradian. This difference of 11.4 % is quite a large difference and the question has to be asked” Why is Muradian at 97% of the asking price while the national average is just 85.6%?” The answer is that Muradian will refuse any assignment that is overpriced based on known comps for business sales therefore Muradian’s listings are always realistically priced.

What are the comps? For the past 12 years we have seen that the average business sale shows a price equal to 2x the profit made by the business. So the selling price for a business making $125,000 would be two times profit or $250,000. This is for a business with no real estate as part of the sale. For businesses with real estate the multiple has been 2.8X the profit number. (Marinas, with high value waterfront real estate show 5X profit as the selling price.) Other factors always figure in the equation and an experienced Business Broker is able to apply plusses and minuses to these averages to arrive at a suggestion of the price at which the business has a reasonable chance of selling in a reasonably short time.

Occasionally a good business will go on the market and can indeed be bought at a bargain price. Perhaps there are special circumstances that will cause a seller to place a lower than normal asking price on a certain business. If so, the broker will certainly point this out as an additional thing a buyer should consider.

Perhaps “lowball,” offers are sought in a poor economy in housing markets for homes that have been on the market a very long time, and where the inventory is far above historic averages. But for businesses, this kind of “bottom fishing” usually comes up short of a successful purchase. A fair purchase price will soon be forgotten but the sweet taste of owning a really fine profit producing business will last for the entire time the business is owned. Develop a relationship with your seller as he is the one to tell you how to operate the business with his many years of success plus he may even be extending some owner financing to you. A better outcome will always be the result when we strive to keep all business transactions ‘win-win”.

Contributed by Jack Crosby, Muradian Business Brokers, Hot Springs, AR, email hsbroker@aol.com