Michael G Wolff
The suggested listing price is often the deciding factor by which business sellers choose a broker. Unfortunately, it leads to a common and very costly mistake: pricing a business too high when going to market. (more)
The fact that only one in ten business owners experience the purchase or sale of a business before it comes time to sell their business makes them a vulnerable target, which became very evident in the 1990s when the Geneva Companies swept the country by fleecing thousands of business owners out of millions of dollars.
While Geneva Companies has pretty much been put out of business, other companies have formed to employ variations of the same scam. Know that these companies are extremely good at what they do or it wouldn't work! So, before you fall victim, consider the following questions before you commit to listing your business for sale with a broker. (more)
Attend this continuing education class for business brokers and learn what the busines brokers learn. For only $105, you can attend this seminar offered by Kaplan Professional Schools and learn about selling your business in a pressure free environment. (more)
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Type: Business-to-business, manufacturing and distribution preferred.
Type: Business-to-business, manufacturing and distribution preferred.
The importance of listing price is not lost on business brokers and, unless there is a prior relationship or strong referral, they know that promising the most will most likely win a listing. Seasoned practitioners are less likely to engage in this practice as they know the devastating effects, though some are very skilled at pitching the “price reduction” strategy. They pitch a strategy that suggests starting with a high price, thereby providing the opportunity to get a premium price. Plus, they will argue, it leaves some “wiggle room” for negotiations. Then, if there isn’t initial success, the price will be reduced.
This strategy is often agreeable to business sellers, and it may win listings, but only because the sellers don’t fully understand the ramifications. If they did, they would know that those who follow this strategy are likely to receive less for their business and endure a longer listing period.
Industry statistics provide some indication of the magnitude of this mistake. Approximately only one in seven businesses listed for sale sells during the initial listing period. However, approximately one in three businesses sells during the second listing period. Though there are a number of factors that contribute to these dismal statistics, a primary reason there is greater success the second time around is the pricing factor.
The magnitude of the pricing issue is further illustrated by a comment made by a broker/student during one of my business brokers’ continuing education classes. The broker said that their primary focus for new business is existing listings as they know the majority of businesses go to market priced too high. They capitalize on this mistake by pretending to have an interested buyer in order to get financial information on the company. Then, if they feel the business is viable, but over priced, they will watch the listing and contact the seller once the listing expires. It was claimed that this is their number one source for new business!
Business sellers would be well served to understand that for any given business at any given time, there are a limited number of legitimate potential buyers. These buyers represent the best opportunity to sell quickly and at a premium. The objective being to get as many buyers as possible in an informal bidding war and letting the market set the price. However, if a business is brought to market priced too high, these buyers will take a preliminary look and move on.
Once the initial buyers have passed, it is very difficult to get them to come back. This means that the seller must now wait for someone new to enter the market. At this point the seller’s negotiation position is severely weakened. Buyers are no longer worried about missing an opportunity (if it was a great opportunity, it would have sold right away). Instead, they wonder why it hasn’t sold and if there is something wrong that they can’t see. Further, new buyers are less educated and motivated, which means they will value a business more conservatively. Obviously, the more motivated a buyer, the higher the price, and the most motivated buyers are those that have been in the market for a while and that don’t want to miss an opportunity.
Long listing periods also tend to ware on sellers and to make negotiating rationally difficult. It is a rare seller that doesn’t become frustrated and worried if their business doesn’t sell quickly. Psychological pressure can then lead to the acceptance of offers that may not have even been considered previously.
While the “price reduction” strategy may seem like a good idea on the surface, it is more likely to lead to a long listing period and a lower selling price. The key is to set a price that will attract buyers right away and provide a foundation for negotiations. Priced correctly, a profitable business will have the best opportunity to sell quickly (six to nine months) and for a premium.
Is the company or individual licensed to practice in your State?
Though licensing requirements do little to ensure competent representation, few organizations and individuals running scams are licensed. They know there is little in the way of enforcement and they typically will take their chances. Check with your state department of commerce if your state requires business brokers to be licensed license
Who will be doing the work and who will be representing your organization on a daily basis?
A common practice is to sell business owners international and Wall Street connections, but then once the up-front money is paid and the seller has listed, the seller is passed to a local broker (typically an inexperienced broker that is not yet aware of the scam). Make sure that it is clear and in writing who you will be working with and how.
Is there an up-front fee?
If so, what does it pay for and are there any guarantees? Organizations running the “Geneva scam” typically charge a non-refundable fee of $35,000 to $50,000 for research and marketing preparation. In same cases, they will try to sell business value enhancement consulting services, which can add $20,000 to $50,000 to the price tag. While legitimate organizations provide these potentially valuable services, legitimate organizations will typically charge as they go and will provide some type of guarantee related to the work. Further, legitimate organizations will not pressure you in their sales process. So, beware of a large up-front, non-refundable fee.
Do they have experience working with any other local businesses?
Again, many of these organizations tout international and Wall Street connections and thereby provide a list of out-of-state references that are hard to verify. If it is not possible for them to provide a local reference, ask to see a list of their completed deals. Small, specialized firms are not likely to have a long list of deals unless they have been around for many years. However, any company doing business internationally and across America should be able to provide a large number of verifiable transactions, not just a few references.
What will be done to promote your business?
Often, the up-front fees are to prepare for going to market and encompass a valuation (pricing) and the development of supporting documents (particularly what is commonly referred to as a Confidential Business Review). Many times, some type of industry analysis is included. However, this information and related materials are only useful if done in conjunction with an overall marketing approach. Since most of these companies pass-off the actual representation to a local broker, they will be hard pressed to provide solid answers related to ongoing marketing and promotion issues. Make sure any promises that are made are made in writing.
It can be difficult to identify fraudulent service providers as they are extremely good at couching their programs to mirror what might otherwise be considered legitimate services. However, by verifying license status, calling references and asking the right questions, you can avoid being bilked by shady brokers.
"It can be difficult to identify fraudulent service providers as they are extremely good at couching their programs to mirror what might otherwise be considered legitimate services."