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Why Set An Asking Price For An Online Business? Shouldn’t The Market Decide?
By Mark Daoust
I remember the first time someone approached me to buy one of my businesses (before I started QLB). They expressed interest in the website, and they asked if I’d be willing to sell. Once we agree that there was mutual interest, they asked me a question which stopped me in my tracks: “How much do you want for it?”
I know how much I wanted, but was I under-valuing what I had built? Should I shoot for a higher price than what I was comfortable with? What if that price is so high that it shuts down any negotiations?
Paralyzed by indecision, I gave the answer that so many small business owners tell us when we ask them the same question: “I haven’t really thought about it. What are you thinking?”
I punted on the question.
I never did sell that first business to those first buyers. Their initial price was too low for me to part with the website, but I am still thankful that they approached me as it set me down the path that lead me to eventually start Quiet Light Brokerage.
But this begs the question: why do we even bother setting an asking price? How do we know that we aren’t undervaluing a website?
Why ‘Make Offer’ = ‘No Need to Pay Attention’
Recently I represented a business whose owner wanted to absolutely maximize his sales price. After performing a standard valuation, he felt as the valuations were too low, that there was value in his business which I was not capturing with our valuation process.
We agreed to test something that we have never tried at QLB. Rather than name an explicit asking price, we chose to put the website up under a generic “Make Offer” asking price. I wanted to test whether this would help illicit stronger offers from buyers who didn’t want to offend the seller with an offer that was too low. After discussing this option with my client, and discussing the possible danger of this causing a broken sale, we agreed to move forward.
The result was decidedly a disaster. Below is some of the feedback we received:
A decent offer if the numbers check out is?
As a buyer, I do not like make an offer as it gives me no insight into the reasonableness of a seller. I do not want to…waste people’s time in the process if there is a large gap.
Does the fact it is a “make offer” because you think it will be a multiple much larger than normal?
Do you have any idea at all of the seller’s expectations? It’s hard to make a decision without knowing where he stands.
After speaking with several buyers about this format, the impact of not naming a starting price was clear: very few people wanted to invest the time in a serious study of the business if the owner’s expectations were far outside of what they were willing to pay. Why spend an hour to review a summary and financials, another hour in a conference call with the seller, and a few more hours reviewing the information in more detail only to find that what the seller wants is double what the buyer is willing to pay?
This experience reminded me of a key tenet in any negotiation: set and manage expectations from the very beginning. The expectation that you set may be that the buyer will be expected to pay a premium, and that is OK. Investors will spend the time if they know it is worth spending.
Why Not Start With a High Offer & Let The Market Negotiate The Price Down?
This approach is, unfortunately, the practice of some within our industry. Rather than help business owners set expectations as to what the reality of the marketplace is, they agree to list businesses at asking prices that are completely outside of marketplace expectations. They know that the marketplace will work on those businesses for sale, and specifically their owners, to slowly hammer the price down. After all, that’s how marketplaces work.
In theory, this sounds like a good approach. After all, even if you get negotiated down off of your asking price, there is a lot more room for negotiation if you start at a high asking price, right?
In practice, however, it doesn’t work this way. We have experimented with different asking prices, and the rule that we have found in repeat experiences is this: when you overprice your business you get too few offers to sustain the asking price. The result is that if you receive an offer, it is typically lower and more complex than if you were to properly price your business.
A properly priced business attracts more buyers which provides enough upward pressure on your asking price to help sustain it. Put another way, properly pricing your business not only manages expectations well, but it gives you leverage in multiple areas. Will you be negotiated off your asking price? Probably. But it won’t be nearly as big of a change as you would experience if you were to overprice your business.
While I am completely in agreement with trying to push the general marketplace to extend beyond its sometimes rigid adherence to multiples, I do find it irresponsible to agree to list a client’s business for sale at a price that I know will never find a buyer. Intentionally overpricing a business puts the seller at risk of losing value in the final sales price for their business.
The Market Is Predictable. It’s Our Job To Help You Predict It.
Although I personally wish our industry had more open sharing of data to help us better refine valuations and expectations for buyers, there is plenty of data to suggest that the marketplace is predictable. Our valuations are not set at random. They are based off of historical data, trends, asking prices observed outside of our own experiences, and data from marketplaces such as BizBuySell.
And it is our job to help our clients predict the marketplace. Our clients may not always like the valuations we provide, but that doesn’t mean that we should blindly encourage them to go to the marketplace woefully unprepared. This will only result in a non-sale, wasted time, and potentially lost value from a broken sale. If the valuation we provide you isn’t strong enough to encourage you to sell, it’s our job to tell you how to get to a valuation that you want.
So why set an asking price? Why not let the marketplace decide? Because the market has already told us what it expects. And while we can push the market’s expectations, we can’t ignore those expectations at the expense of our clients. Setting an asking price the effectively pushes the marketplace, but works close enough to its expectations helps you maximize your value, and that is, after all, the goal we have for each of our clients.