Not every company can go to market without an asking price. But for the ones that can, a no-price strategy gives the seller an advantage.
Ask two professional valuation experts to determine your business value, and you’ll probably get similar numbers. But ask two or more buyers to value your business, and their target price may vary significantly.
That’s because your business is worth more or less to different buyers, depending on their motivations, resources, and business synergies. Buyer A may see you as the fastest way to get a toehold in the market while Buyer B knows acquiring you is the best way to keep Buyer A out. How they price your business will depend, in part, on how badly they want to reach their goal.
Your business has a theoretical, academic value and it has a real world, rubber-hits-the-road, market value. The only way to get at that real-world number is to go to market without an asking price and, hopefully, generate a competitive environment with multiple would-be buyers.
Sellers who do that will go to bed at night and sleep soundly knowing they got the best possible over all deal the market would bear.
Asking price on Main Street businesses
Smaller companies valued at less than $2 million, and those most likely to be purchased by an individual, are typically marketed with an asking price. That’s because individual buyers respond better to a price benchmark. If they don’t have experience valuing a business, pre-priced opportunities look like an easier, less complicated way to get into business ownership.
When selling these smaller Main Street businesses, your pricing strategy is going to be a lot like selling a house. You want to set the price as close to market expectations as you can so you don’t scare off would-be buyers with a sky-high price expectation.
According to the Market Pulse Survey, Main Street sellers earned, on average, 89% of their published asking price in Q1 2019. Of course, just like a house, if your business attracts interest from multiple buyers, you may still get into a competitive situation in which buyers offer more than the listed price.
No asking price for lower middle market
For businesses in the lower middle market, buyers are typically strategic businesses, private equity firms, and family offices. These buyers have considerably more experience making acquisitions and, when given the correct information, can value a company according to their own goals and criteria.
In these situations, beauty is in the eye of the beholder. We’ve put out the exact same information on a company, answered all the same buyer questions, and had multiple offers come in with millions of dollars of difference.
What adds value to one buyer doesn’t always add value to another. Many times the price difference comes down to motivations such as synergies between the two businesses, defensive moves (buying a business so your competitor doesn’t), or offensive moves (eat or be eaten in a consolidating market).
When buyers evaluate a business without a pre-set asking price, they approach your business without bias. They must take a solid look at the opportunity to understand your strengths and weaknesses, how it might fit their portfolio, and what the value truly is to them.
According to the Market Pulse Survey, companies in the lower middle market are earning 101% of the internal (unpublished) benchmark price right now. That premium will ebb and flow with market conditions.
What we tell buyers
Of course buyers still want to know “what the seller really wants.” They try to get us to name your target and throw out the first number.
Typically, we tell buyers that we’ve tried to give them enough information so they can make their own well-informed decision on that front. We’ll offer to get them more info, if they need something specific, but we don’t start negotiations.
In limited situations where we’re working with a lesser experienced or non-strategic buyer who needs some coaching, we might suggest multiples of EBITDA, giving them a range in which other similar businesses have sold for in the past.
But competition is competition. We can’t predict where other buyers will come in. Buyers need to value a business according to how badly they want to complete the deal.
A controlled, competitive auction environment creates scarcity and urgency. When you have multiple buyers at the table, they need to move on your timeline. And if they want to be the one to win the deal, they need to start with their best foot forward.
That’s why we don’t publish an asking price for your business. What we think it’s worth doesn’t really matter—it’s what the market will bring that counts in the end.