31 Oct The Intricacies of Defending a Seller’s Asking Price and Making Deals Happen
In our previous article, “Defending the Seller’s Asking Price,” we touched on some of Glen Cooper’s basic points for how business brokers need to prepare to defend the seller’s asking price. This topic was presented in our webinar entitled “Structuring the Transaction: Defending the Seller’s Asking Price.”
Glen Cooper is an expert in the field, as he has been a business broker since 1976. He is a credentialed business appraiser for 26 years, a founder member and Fellow of the IBBA, a former CBA and BVAL with the Institute of Business Appraisers, and he provides coaching to business brokers and more. Let’s jump in and explore more of Cooper’s key points on what business brokers and M&A advisors should do to ensure that their client’s asking price will pass the laugh test and help deals get made.
Cooper emphasizes that the job of a business broker is to “demonstrate value, not just talk about it, but actually demonstrate it.” At the heart of demonstrating value is showing that you are credible, knowledgeable, capable, and, of course, trustworthy. You must endeavor to educate yourself about every aspect of your profession. Cooper points out this process will take several years. However, as pointed out in the previous article, business brokers and M&A advisors should not attempt to justify the seller’s asking price on their own. Instead, they should partner with a properly prepared seller as part of a co-selling process.
There are many parts to making the selling process go smoothly. At the top of the list is that the selling price must pass the “laugh test.” If the selling price doesn’t seem reasonable, then progress will be very difficult. Another aspect to consider is seller financing. Cooper states that many of his clients are against seller financing.
There are many reasons for this resistance, but they include a fear of the unknown regarding potential downturns in the economy. Yet, seller financing stands as a potentially key part of the process. Cooper has observed that initially sellers are against seller financing, but as they go through the process and hear the horror stories about bank loans, how long they take, and the related complications, their views on seller financing tend to change. As he points out, “When a seller is offering seller financing, the speed of closing can be very, very fast.”
There are other steps that you can take to not only justify the seller’s price, but also help ensure that deals are made. For example, Cooper’s NDA and buyer registration form requires prospective buyers to disclose how much money they have to put down for the business. He notes that there are many prospective buyers, but only a small percentage are actually qualified and serious. He notes, “Don’t let buyers who don’t have money talk to your seller. Its’ just not worth it.”
Additionally, Cooper feels that it is necessary to have a debt coverage ratio where the buyer can ultimately make a profit and pay themselves. In short, the buyer must have enough money left over to pay the total debt service and principle in the year.
The process of justifying the asking price of a seller’s business is not a straightforward one. It is a symphony of moving parts, and the seller must be both educated on the process and involved in the process. Ultimately justifying the asking price is the launching point of the process, but it is also just the beginning of the process. He recommends looking out for the best interests of not just the seller but the buyer as well. For example, the buyer must be able to see how they will successfully own and potentially operate the business, as this is essential for fostering a completed deal.
