What affects the selling price?
Several factors come into play and can affect the sales price. One of the
most critical is the “terms” or the amount of down payment and the amount
financed. Over eighty percent of all businesses sold above $1,000,000 are
sold with one-third or less down and the owner financing the balance.
Asking for one-half down will reduce the price by approximately twenty
percent. Asking for cash will reduce the price to about forty to sixty
percent of the amount attainable with one-third down.
Down payment or the “terms” is a key factor, because a buyer is trying to
buy as much business as possible for the money available for down
payment. So, when a seller asks for $2,000,000 down on a $4,000,000
value business, buyers prefer to continue looking until a $6,000,000 value
business is found where the owner will accept $2,000,000 down and
finance the balance. The seller who asks for all cash or a large down
payment is not going to succeed in obtaining the full fair market value of
their business, because buyers know they can buy three times as much
business for the same investment. In a nutshell, high percentage down
payments cause buyers to discount offers. (We also work with companies
that will buy unseasoned seller notes.)
A second critical factor is the quality of the information provided to a
prospective buyer. The value of the assets and cash flow generated by the
business must be provable and verifiable. A professional business broker
will be able to assist the business owner in arriving at these values.
The third most important factor that affects the sales price of a business is
whether there is competition among prospective buyers for the business.
Competition creates higher selling prices, as we all know from basic
economic principles. When a business owner asks for more than the fair
market value for their business or does not offer reasonable terms, there
will be few, if any, buyers interested in acquiring the business. On the
other hand, when a business is priced realistically and with proper terms,
multiple buyers are likely to pursue acquiring the business. A buyer who
knows he has other buyers competing for the business will be motivated to
offer the price being asked to ensure he does not lose the business to
another buyer's better offer.
Down Payment % Price realized % Properly Listed biz closing %
20 % 120 % In excess of 80 %
33 % 100 % In excess of 80 %
50 % 80 % Less than 40 %
100 % 40 % to 60 % Less than 20 %