Badly Overpriced Businesses

Some sellers prefer a strategy of initiallyoverpricing a business, then backing down the pricing curve until the market responds to a given asking price.

“Everybody is familiar with the saying ‘We can always reduce the price but can never go up,’” says Achim Neumann, President, A Neumann & Associates, LLC, a New Jersey based M&A and business brokerage firm, “and following that logic, some owners like to start with an inflated asking price.”

However, significantly overpricing a business – many advisors call it a “fishing expedition” – nearly always translates into significant problems with a broad set of negative consequences:

• The business won’t sell but will generate a lot of wasted time, unproductive buyer introductions, and so forth for the seller (and advisor) and will be “on the market” for a long period of time until the seller adjusts the price to market conditions;
• Competitors are eager to look at the business (in order to learn more about its customers, employees, financial condition, and business practices) with no real intent to proceed but with a great opportunity to gain competitive knowledge;
• The longer a business is “on the market,” the more likely it is that confidentiality will eventually be breached – with key information conceivably making the rounds to competitors, employees, customers, landlords, and banks;
• Once employees find out the business is for sale, they tend to leave if not otherwise “retained” with an extra “transition” bonus, resulting in higher expenses for the seller. Worse yet, the “rumor mill” will distract employees from doing their jobs and reducing productivity. Soon the rumors will spread from employees to customers and vendors;
• Customers are likely to shift their order patterns to alternate supply sources due to concerns about future product supply;
• Vendors may cut credit lines, and if it’s a manufacturer’s rep situation, the vendors may look for alternative representatives;
• Meanwhile, management will be kept busy fighting the pending sale rumors in order to hold on to customers, employee and vendors;
• Landlords and banks will be reluctant to extend agreements due to concerns about the viability or creditworthiness of the potential new owners of the business;
• If a breach in confidentiality leads to a defection of vendors, employees, or customers, the business cash flow will decline, requiring a re-valuation and re-positioning at a lower price than the original fair market value.

There is simply no good reason in overpricing a business, as buyers will ultimately only pay the fair market business value for an acquisition.

Conceivably, there could be a 10% to 20% price premium available in a very few special scenarios from a strategic buyer – implicitly the result of perceived cost savings or additional revenue opportunities from the merger – but going beyond such price premium creates more challenges than benefits, including considerable downside.

“We always request an independent fair market valuation prior to marketing a firm, and we absolutely do not represent over-priced businesses”, says Gary Herviou, ANA Vice President. “However, we wish all the folks still considering an over-pricing strategy all the best.”