As M&A advisors, our objective in most sale processes involving a privately held lower middle market business is to help our client obtain the best price and terms available in the marketplace. In many of our sale engagements, we go to market without an asking price and use a broad or targeted auction format to elicit the best price and terms from multiple suitors.
When buyers feel competitive pressure, they are more likely to make their best offers in each round of bids. If a buyer doesn’t step up in a bid round, they risk being dropped from the process and losing out on the acquisition opportunity. Often, especially when strategic buyers are present, one or more buyers will place a significantly higher value on the business, sometimes a much higher value.
When should a seller consider setting an asking price for a business?
- When selling a smaller main street business. Buyers of these businesses are usually inexperienced financial buyers who need pricing guidance.
- When a seller is motivated to get a deal done quickly and is prepared to accept the first bonafide offer at a certain minimum price. Perhaps a seller has a health issue and needs to sell quickly.
- When similar businesses have been trading within in a narrow valuation range and the probability of obtaining a strategic premium is low. For instance, accounting firms trade in a fairly narrow range.
- When selling an asset intensive business having its primary value in the underlying tangible assets like inventory, vehicles, machinery and real estate. Hotels and wineries with marginal cash flows are good examples.
- When there are no interested buyers at the present time and the business will be advertised on several business for sale websites.
- When selling to management, employees, family or other related parties. Best practice is generally to present a price at Fair Market Value as determined by an independent business valuation.
- When the business is so unique that bidders need pricing guidance.
- When required to set a price for regulatory or legal reasons.
Pricing strategy is just one of the many services our team of seasoned M&A advisors provide during a business sale engagement. Optimizing client outcomes is the result of many things done right.
Al Statz is the founder and CEO of Northern California based M&A brokerage and business valuation firm Exit Strategies Group, Inc. For further information on this topic or to discuss a current M&A or valuation need, Al can be reached at 707-781-8580 or firstname.lastname@example.org.