How Important Is the Asking Price?

The asking price is one of the most important decisions in selling a business because it determines which buyers engage. A price well above what the business can support tends to keep qualified buyers from making an offer at all, which removes the negotiation the seller was counting on. A price grounded in the business's cash flow and comparable sales attracts serious buyers and gives the seller a stronger negotiating position.

Where sellers' numbers come from

Most sellers have a number in mind. Sometimes it is based on real knowledge of the industry and what similar businesses have sold for. Sometimes it reflects what the owner needs for retirement, or what feels fair after years of work. Buyers do not factor that second kind of number into what they offer.

Why "we can always come down" backfires

A common seller strategy is to list high and plan to negotiate down. The problem is that buyers do not know the seller is flexible. They see a price that looks unrealistic and conclude that a reasonable offer would be too far off to be taken seriously, so they move on to other listings.

The buyers most likely to skip an overpriced business are often the most qualified ones, because they know the market well enough to recognize the mismatch.

How much below asking do businesses sell for?

Most businesses sell for somewhat less than their asking price, and the gap tends to be smaller for larger businesses than for smaller ones. That data comes only from businesses that actually sold. It says nothing about the businesses that never found a buyer, many of which were priced too high to begin with.

How a realistic asking price is set

A business broker uses several tools to arrive at a defensible starting point:

• Comparable sales. Market data on what similar businesses have sold for, where available.
• Cash flow and multiples. The business's earnings, usually measured as seller's discretionary earnings for smaller businesses, multiplied by a figure that reflects its risk and appeal. See SDE and EBITDA Are Not the Same Number.
• Business-specific factors. Location, competition, the consistency of sales from year to year, the down payment required, and the terms the seller will offer all move the multiple up or down.

For a closer look at how buyers weigh these factors, see How Buyers Value a Business.

The market has the final say

Ultimately, the marketplace sets the selling price. If every interested buyer is willing to pay a certain amount and no one will pay more, that is what the business is worth in the current market. The seller does not have to accept it, but serious sellers listen to what the market is telling them.

For Southern California owners who want a grounded, market-based starting point, BusinessQuest Brokers provides confidential valuations. Request a valuation.

Frequently asked questions

Should I list my business high and negotiate down?

Generally no. An inflated price discourages qualified buyers from making offers, which can leave the business on the market longer and ultimately lower the final price.

How is the asking price of a small business determined?

Usually by applying a multiple to the business's cash flow, adjusted for factors such as location, competition, sales consistency, and terms, and checked against comparable sales where data exists.

Do businesses sell for their asking price?

Most sell for somewhat less. The difference tends to be smaller when the asking price was realistic from the start.