This article are provided for information purposes only, and are not intended as legal advice.


Buying a business, do you low ball the purchase price?

February 1st, 2010

You have found a business for sale and want to make an offer.  What price should you offer?  Should you come in around the asking price, slightly lower or a lot lower?  Before making an offer, you have to go back to basics, why were you interested in this business.  Was it synergistic?  What attracted you to the business.  Is the price reasonable or is the price overstated?

 

Remember, there are no two identical businesses being offered for sale with identical purchase price.  Each business is unique.  If you are looking to buy a business or if you are looking to buy a franchise, no two businesses are alike.  One has more sales, different product mix, different profitability therefore a different asking price for the business.  If you upset the vendor, they may not want to deal with you no matter how good your next offer is. If they no longer want to deal with you, there is nothing that you can do, that business opportunity will no longer exist and I have seen this on many occasions.  Some business owners have unusual reasons for not dealing with a potential vendor.  I have seen a vendor who was an alcoholic refuse to negotiate with a buyer who was a former alcoholic current in AA.  Why – too close to home?  Once the vendor makes up his mind, for whatever reason, you can’t persuade them to change their mind in the future.

 

If the vendor knows that you are a competitor and there are lots of synergies between the two companies which will result in large cost savings, the vendor will expect a price far higher for the business than with a buyer of a business who will generate no synergies.  If you are looking for a house, there are many houses in the same subdivision and if you don’t buy one, there may be a similar one for sale now or in the future.  When you buy a business, there may not be another similar business for sale for a long time.  If this is a market leader, the opportunity to buy this type of business may not be available for many years together. 

 

Is the price reasonably priced?  If so, your offer should be reasonable.  What is reasonable – within 10 to 15% of the asking price?  If you are offering 50% of the business and the price is reasonable, then they may not come back to negotiate with you.  If you have a business broker, they can try to feel out the seller of the business to find out what their range is.  As a result, when an offer is officially tabled, it is within the range that the vendor is not finding offensive.  That is the beauty of using a business broker, they can softly negotiate the price, remain independent and try to come up with a fair offer. 

 

Remember, fair market value of a business is when both the vendor and buyer of the business are unhappy.  One thought they sold for too little, the buyer thought they paid too much.


Filed under: Buying a business — Gary Landa @ 1:29 pm


No Comments »


No comments yet.


RSS feed for comments on this post. TrackBack URL


Leave a comment


You must be logged in to post a comment.