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Asking Price Inflation Of An Online Business Only Hurts The Seller
By Jason Yelowitz
You only have to look back to 2009 or 2010 to see that there was very little competition back then for selling websites. If you wanted to sell a website 6 or 7 years ago, you had a choice of maybe 5 brokerages. Quiet Light was one of them.
Fast forward to today, and you can choose between 30 or 40 different brokerages to sell your online business. The website brokerage industry is getting bigger all the time, therefore competition is becoming fiercer as a result.
Competition can bring out the best in some people, but it can also increasingly bring out the worst. For a broker on commission, it may sway them to resort to some less than desirable tactics to close a deal, and steal a client away from a rival.
Competition can bring out the best in some people, but it can also increasingly bring out the worst.Click to tweet
Asking Price Inflation – Music To The Seller’s Ears
One of those underhanded and unethical practises is asking price inflation. Put simply, this is when a broker, eager to sign on a new client and potentially earn a big commission, tells that potential client that their online business is worth a lot more than what other brokers are quoting.
This subsequently creates the false impression that the other brokers are lowballing the business owner. So, wanting to believe that they own a much more valuable business, the business owner signs with the broker suggesting the highest asking price.
It’s only human nature, so you can’t really blame the seller for wanting to go with the professional promising them the most.
But asking price inflation can have a very negative effect on the seller’s long-term sales prospects, for the following reason –
The Marketplace Ultimately Determines The Value Of a Business, NOT The Brokers
Mark Daoust wrote an article back in 2014, wondering why we bother setting an asking price at all. Shouldn’t the marketplace decide instead?
As Mark said in the article, why would any serious-minded potential buyer spend valuable time examining the business if the seller is demanding far more than the buyer is willing to spend?
If the broker is, in essence, “egging on” the seller to demand more money than is actually warranted, in the end, the serious buyers will balk and then walk.
This leaves the seller with only non-serious people who will mess them around with lowball offers and/or offer terms which are often sub-optimal to the seller, if they decide that those are their only options.
One of these occasionally unbeneficial terms are “earn-outs” where, if the seller is asking for too much, he is promised in the sales contract to get an extra amount in the future, dependent on the company’s future performance. So for example, the amount the buyer is willing to pay in cash + 5% gross profits over several years.
As you can imagine, agreeing to a deal like that could be seen as rather risky because the new owner could very well let the business seriously decline, or make business decisions which end up having a seriously negative impact on their profit margins. In the end, the seller would lose out.
A Starting Point For Negotiations
Deciding on an asking price could merely be seen as a starting point for negotiations. After all, the first question any potential buyer is going to ask is “how much were you thinking of?” So having a starting figure is always good to get the ball rolling, as well as enabling you to set the expectations you have for your deal (rather than buyers setting them for you).
But that figure must be grounded in reality and not just wishful thinking. It must also backed up by reliable data to justify asking for that amount.
The formula used to value a business is an imprecise one at best. We say “imprecise” because it is seen as a “predictive formula”, relying on the previous 12 months’ discretionary earnings to provide a “snapshot” look at the business’s past performance and future potential performance. Therefore the value of the business could slightly increase or decrease as a result depending on the next few months earnings.
In the end, it is not the formula which will decide the final sale price, but instead the formula will tell the seller how much the site is likely to sell for on average, based on various factors such as market conditions, and similar listings.
Having that sales data in your corner is still a huge advantage though when trying to persuade a buyer that this is the amount they need to be thinking of. Having a naive broker randomly pluck a figure out of the air does nobody any favors at all.
Being able to give the seller a fairly accurate view of what a buyer will actually pay, and on what payment terms, is what we strive to do at all times at Quiet Light. We pride ourselves on trying to set as realistic expectations as possible.
The Business Value Will Eventually Find Its Proper Level
As a seller, we advise that you consider the true market value up-front. Remember, you will always have the opportunity to accept or reject any offer that comes your way.
The market will find its proper level if a listing is priced reasonably correctly. If the business turns out to be under-priced, a bidding war between various interested parties will likely bring the value up to where it should be. So ultimately it all evens out in the end.
If a business is under-priced, a bidding war between interested parties will bring the value up to where it should be.Click to tweet
Having a honest assessment of the business’s value from the very beginning reduces the chances of losing a serious buyer due to over-pricing, and therefore disappointment by the seller towards the broker and the buyers. Therefore realistic expectations really is the best policy all round.