Overcoming Price Objections When Selling My Business

Price Objections

After expressing interest in purchasing a business, some buyers fail to make an acceptable offer because they deem the asking price as too high. This is called a price objection, and may be overcome in many instances. Sellers of businesses should not automatically desire to lower their asking price in the event of a price objection. Serious buyers may be properly guided through the valuation process by the seller’s business broker. Keys to overcoming price objections are emphasizing the high Return on Investment (ROI) of a business to prospective buyers, growth opportunities, and the competitive advantages or unique qualities that competitors can not easily match. Price objections may often be overcome by an experienced business broker with confident, clear, and data-driven answers that the buyer will understand.

Justify Asking Price

The key to overcoming price objections from buyers is justifying the asking price with hard evidence and data. Businesses are generally valued as a multiple (typically 2-4 x) of the annual adjusted owner benefit generated by a working owner (depending on the industry). This indicates the level of future cash flow that a buyer may expect to receive, and hence determines a buyer’s Return on Investment (ROI). The seller’s business broker should justify the asking price in the confidential prospectus given to buyers by showing how the adjusted owner benefit was obtained and disclosing valuation multiples of similar businesses being sold. The prospectus should include historical financials, a physical asset list, and a comprehensive review of the competitive advantages of the business that will be retained by the buyer after the sale.

Adjusted Owner Benefit

Many buyers who object to the asking price of a business fail to recognize or understand the advertised annual adjusted owner benefit. The term owner benefit refers to the economic profits derived by a working owner of a business. This can be very different from the reportable net profits on a company’s tax return or profit and loss report. Owner benefit includes ‘add-backs’ such as the owner’s salary, personal expenses of the owner that flow through the financial statement, and other adjustments to reflect what a buyer would earn from the business under normalized conditions. The confidential listing package prepared by the broker should clearly walk prospective buyers through the process of determining the adjusted owner benefit. Prospective buyers should also be assured that they may prove the adjusted owner benefit as a contingency to close during formal due diligence.

Apply Justifiable Valuation Multiple

Once the adjusted owner benefit is determined, a valuation multiple is applied in order to determine the asking price. The multiple valuation range for businesses within any particular industry may be obtained by business brokers using bizbuysell.com and other websites. For example, the median valuation multiple for a restaurant in Florida is 2.74 x its annual adjusted owner benefit. Restaurants with a strong growth rate, below market lease, and premier location will have a higher than average valuation multiple. Competitive advantages- or a company’s ability to offer a better product or service – justify a premium valuation so long as they remain intact for the buyer after the closing. If the seller is personally responsible for the competitive advantages, then price objections are harder to overcome. In that case, the asking price may need to be reduced in order to reflect its fair price.

Example of Overcoming Price Objections

  • Charlie has his chain of liquor stores confidentially listed for sale with a professional business broker.
  • The asking price is $3M with an advertised adjusted owner benefit of $600K (Charlie is relatively absentee and only works part time in a managerial role).
  • Ben the buyer eventually makes an offer of $2M for Charlie’s business.
  • The broker calls Ben and relays the news that his offer has been rejected for being far below Charlie’s expectations.
  • How can Ben’s price objection be overcome?
  • First, Ben and the broker review the confidential prospectus which discloses the historical financials.
  • Ben did not fully understand why the $600K of advertised adjusted owner benefit differs from the net taxable income of $400K.
  • Ben mistakenly assumed the business generates $400K of economic profits when in fact it generates $600K.
  • The broker walks Ben through the financials and explains how $100K of Charlie’s personal expenses flow through the financial statement and is considered an owner benefit, and why $100K of interest costs relate to non-assumable debt and is also considered part of the owner benefit.
  • The actual economic profits or owner benefit of the business is $600K, and not $400K.
  • Further, the broker explains that since Charlie is relatively absentee, Ben has no reason to fear the loss of customers, suppliers, or employees after the sale.
  • Thus, Ben should be assured that his owner benefit will also be $600K/year.
  • Then the broker shows Ben the list of recently sold liquor stores in the confidential listing package.
  • The median valuation multiple for liquor stores in Florida is 4.54 x annual owner benefit, which is below Charlie’ valuation of 5 x owner benefit ($600K x 5 = $3M).
  • Looking more closely at the list of recently sold liquor stores, however, the broker shows Ben how larger liquor stores with multiple locations have a premium valuation multiple due to their better established brands, cost synergies, and revenue enhancements.
  • Indeed, it is rare to find a large liquor store that sold for less than 5 x its annual adjusted owner benefit.
  • Moreover, the absentee-nature of Charlie’s chain of liquor stores warrants a premium valuation multiple as Ben faces no risks, costs, or future sweat equity from replacing Charlie’s role in the business.
  • Ben’s price objections are primarily as a result of not understanding the adjusted owner benefit and not understanding why Charlie’s chain of liquor stores warrants a premium valuation multiple.
  • By guiding Ben through the valuation process with established evidence and data, the broker may overcome Ben’s price objections.

Not every price objection may be overcome, but a knowledgeable business broker should always be prepared to justify the asking price of a business in order to effectuate the best possible price and deal terms.

Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.