Consequences of Overpricing a Business
When you decide to sell your business, one of the most important decisions you must make is your asking price. While you don't want to underprice your business, you should be aware of the following generally recognized statistics in the business brokerage industry in California:
- Businesses priced within 10% of fair market value have a 70% chance of selling within six months.
- Business priced between 10% and 20% of fair market value have a 50% chance of selling within six months.
- Businesses priced between 20% and 30% of fair market value have a 40% chance of selling within six months.
When determining the asking price of your business, you should recognize that supply and demand determines the value of every business. In short,. a business is valued by what a buyer is willing to pay for it.
Please consider the following that apply to overpriced businesses:
- Many business brokers will not present the business to prospective purchasers because they fear losing credibility with their clients if they show an overpriced business.
- Buyers seeking businesses within a certain range will never be exposed to the business. For example, a prospective buyer seeking a business valued between $450,000 and $500,000, may never be exposed to a business worth $500,000 that is overpriced at $600,000.
- Sellers that start high and stay high may be branded as unreasonable, causing some business brokers and buyers to pursue other opportunities.
- Many buyers hesitate to make offers on overpriced businesses because they are embarrassed to do so.
- Marketing time is extended causing some buyers to believe there is something wrong with the business.
- When some buyers see a business on the market for a long time, they assume the buyer will be under pressure to sell. Consequently, they tend to make low offers.
Businesses sell fastest and for the highest price when there are many business brokers and agents competing with client offers. Reasonable asking prices generate multiple offers.