- How most business brokers start their career
- Why business owners have unrealistic expectations for price
- Importance of pricing your business correctly
- The first offer is often the best
- You can’t afford to stay too long in the market
- Some take away tips for business brokers
Joanna: Hi it’s Joanna Oakey here and welcome back to The Deal Room podcast, a podcast brought to you by our commercial legal practice Aspect Legal.
Today we look closely at pricing issues in selling a business. I’m sure all business brokers are familiar with this scenario, where they find themselves disagreeing with their clients on how much the business is worth. So I’m pretty sure today’s discussion is quite a hot topic for all our business brokers and advisers out there and certainly, it’s an interesting one for any business owner who is looking at selling their business into the future.
And of course, joining me for this discussion is Zoran, the Founder and Principal at Xcllusive Business Sales. Zoran, like most brokers, started at the other side of the fence as a business owner who wanted to sell his business, who hired a broker to help him with the sale, and then realised he could do a better job selling his business himself.
So I’m super excited to share this fabulous conversation with Zoran. So keep listening, and we’ll jump right into it!
Joanna: Zoran, thank you so much for coming along to The Deal Room podcast today.
Zoran: You’re welcome, Joanna.
Joanna: Okay. Now today we’re going to kick it off by talking about problems with pricing. I think this is quite a hot topic. I know lots of brokers I talk to lament the fact that sellers who are coming in generally have unrealistic views of what their business is worth.
But I thought it’d be useful today if we dig into why pricing can be a real problem and why it can be a problem I guess to follow a client’s lead where they are sure that their business is worth way more than what you as a broker believe the market is likely to value it at. Maybe we dig into that topic today.
But first, before we do that, I just thought I’d like to, in order to give us a bit of context, maybe talk a little bit about how you started Xcllusive and why you started Xcllusive and your business sale event in the background that sort of kicked off your broking firm.
How most business brokers start their career
Zoran: Okay. Just about every broker that I met in my life actually started their career the same way, where they have a business. They try to sell it. They are not happy with what they discovered or experienced in the market and they say I’m going to do this. I’m going to do it better. And then they go out and experience the market. It’s true anywhere.
Joanna: You’re absolutely right! You took the words right out of my mouth, Zoran. I was actually going to say that. I was going to say it’s incredible how often I hear this story that a business owner sold their business and just realised that they could do it much better. So they set up a broking business. Tell us why. What were the issues?
Zoran: When I started my business, I thought it was a really original story. Then as I’ve met other people, I found out it’s not an original story at all, that everybody had done it that way.
Joanna: Yeah yeah.
Zoran: What very quickly brokers discover when they go out there is that the charging model that the brokers have is actually not justifiable. Few of the guys that you had on the show before talked about the charging model. The problem is because it’s coming from the real estate industry and it’s governed by the Real Estate Institute legislation, a lot of brokers actually go out there and start charging these commissions and it sounds really good.
Some charge 10 percent whatever you charge. You think wow you are going to make a lot of money and they start thinking about it like real estate. Then they go on real estate training. They get real estate training and in real estate it’s all about listing, getting your listings on board. But business broking is actually about selling.
There are two distinct pipelines. One is working towards getting people on the market or getting businesses in the market. It could be anything between four weeks up to two years or three years before you’ll talk to potential clients. We get them on the market and then you have to sell the business. That again can be anything between six months to about three years. I’ve spoken to somebody who has done business broking for about three years and he just said to me. Look, the last business that I sold was the first one I actually listed.
So what happens out there when the broker goes out there and experience this problem, well you have got to pay the bills. So it’s a business. We got to pay the bills. They start charging this upfront fee, and that actually gets him through and pays the bill. Cash is cold before the commissions start coming.
So it creates this moral hazard that the business broker, when he sits in front of the client that he knows that the business is worth a million dollars who wants two million dollars, he said okay. Let’s have a go. Fully knowing that he can’t achieve that. But the pressure of the market and the pressure of economics and reality pushes him towards that.
Joanna: I think it’s also the pressure of. It’s the pressure of your clients as well. Right? Because they’ve been at business owners come in. And I’ve seen lots of times. They have real certainty that their business must be worth this amount of money and quite often that amount of money is based on the amount of money they feel they need to take out of it, not a reflection of value in the marketplace.
Why business owners have unrealistic expectations for price
Zoran: Yeah. There are a few reasons for it. One is that they price their business and they say that business owes me so much. For example, I’ll invest three years of my life and three hundred and four hundred thousand dollars and now business is not really worth that. But I feel it’s worth that because I want somebody else to pay for my mistakes. It doesn’t happen in real life.
Another issue why they got this unrealistic expectation is because very often first point of contact is the accountant. So they’re going to go and see their accountant. Accountants go and sit in front of them. He is going to look at the figures and he’s afraid to underprice. So what they do, they actually overprice the businesses.
They will use some very funny methods. But very often, they look at everything that they take out of the business. They multiply it by three, because it sounds like a good number, and then they add asset and then they add the stock on top of that. And very often, it goes more than double what the real value is.
So when the broker sits in front of the client and gives him realistic evaluation of their business and a realistic market value, they have on one side the accountant advising them double the value and that’s somebody they have been dealing and trusted for 20 years, and they’ve got somebody they have just met who’s telling them half of it. That’s another problem why people go on the market for way more than what the business is priced.
Importance of pricing your business correctly
Zoran: But here’s the problem. This is what happens. And it happens not just in business sales, but if you’re selling anything for that matter. Let’s say you’re buying a house.
Let’s say you want to buy the house and you’ve been on the market for six months. It takes about six months to figure out what the prices are on the market. When a good house comes in the market priced exactly, you’re going to go and you’re going to be the first person that goes there because you already missed other two or three deals and you’re going to go with your best foot forward.
If the same house goes up 30 percent more than what the market value is, you wouldn’t even approach. You won’t even put the offer because there is no dead urgency. When you see something that’s well priced, you want to be the first one because you don’t want to miss out.
But if you overpriced that house, it stays in the market. Especially now, in this market that’s going backwards, it’s going to sit on the market for two weeks and then four weeks and then six weeks and then three months. The first thing when you see something like that. The first thing that the buyer thinks is what’s wrong with it. So then they won’t even give it the time to actually go and visit.
Joanna: I think we can all relate to that certainly. The property analogy is a really good one because it’s something everyone can relate to. The houses that don’t sell quickly, sell very very very slowly. Right?
Zoran: And they sell below the market value because after a while, you got no other tools to entice the buyers to look at it, then to actually make it a bargain. Now I really believe that 80 percent of the businesses out there are sold exactly that way.
If you want to do one thing right when you’re selling the business, price it right. So get a certified valuation. It doesn’t have to be certified. But get a really really good valuation. If any broker or any accountant tells you a value that kind of seems to be too good to be true, it’s probably not true.
The best way to go about it is ask them for comparable sales. So tell me three or four businesses that you’ve sold that are similar to mine that you sold for this multiplier or for this value, whatever method you use.
If he doesn’t show you that, it’s because they don’t know. They’re pulling their numbers out of the air or trying to entice you to go with them. Run. So the most important thing is to price this business right.
When we’re selling a business, we do a quite comprehensive valuations and we don’t take them on the market unless they want to go now. But it’s not because we don’t want to waste their time selling or we don’t want to work without getting paid. But that’s because it’s the right thing for the person across the table from us. It’s the right thing for the person selling the business.
We know that once we got you a database, once we go to your hottest buyers and you give them a call and you offer them something that’s too expensive, they’re just going to say no. So if I offer them something for one point five but they think it’s worth a million dollars, they’re going to say no.
If six months later, I come to you with the same business and said look we’re going to expect a million dollars from you. The first thing they’re going to say is well you obviously talk to me because you’ve got no one else to talk to. So it’s not a million dollars now. Now it’s eight hundred.
The first offer is often the best
Joanna: So can you tell us. I mean I’m really interested to hear some examples of where you’ve seen this played out with very poor consequences.
Zoran: Look it happens all the time. It even happens when you price the business right. I can give a couple examples. We’re going to change the name and places to protect the guilty and innocent, nearly guilty parties.
This is what happened. There was a tourist attraction type of business that we were selling in Victoria. We took it to the market for one point two, and it was exactly one point two regular, and literally the next day we had an offer. Well, not an offer. But we had a buyer who said they’ll pay the asking price.
The first reaction from the seller was look we underpriced this business. I mean why would somebody buy within 24 hours when I was expecting it was going to stay on the market for six months. So what happened, they said look. They didn’t accept that, and they increased the price to, against all our advice, they increase the price to one point eight million. Needless to say, the first buyer walked away. Then 12 months later we end up selling the same business for 900 thousand.
Now one point eight million dollars detracted people from it and it took about. It took all this time for the seller to actually realise that the original offer, and very often, the first offer is always the best. But we had no relation anymore. The only way to attract people to the market, to business that was in the market for such a long period of time is to actually make it a bargain.
This happens way too often and any broker that you can talk to will tell you exactly the same. Like every broker, and anybody who is dealing with people like accountants, to really advise them properly on their price because it’s counter-intuitive and it’s really really dangerous to appraise the business. It cost them a lot of money. In this particular case, what was there, about three hundred thousand dollars loss.
Having said that, they kept the business for a longer period of time. They’ve got a profit out of it, so they can justify that to themselves. But in reality, that was three hundred thousand.
Joanna: Yeah, yeah. Well, it’s really sage advice there. And it’s great. I really enjoy hearing these examples because it really helps to, I guess give character to the point. Because as I said when we kicked off, it’s the issue that I hear business brokers talk about so often, that the issue of the seller having a particular view of the value of their business or in the case I guess of the business that you’re talking about here. Initially the sellers had accepted that they would go out at one point two. But then suddenly, they felt like they could get more so they raised that bar.
At the end of the day, the problem is the emotion is connected to people who built businesses generally for a substantial period of time, put in a substantial amount of effort. They feel like they need to maximize the outcome of that effort. But at the end of the day, you’re also playing with the psychology of the buyers. I guess that’s it. That’s the real critical element.
You can’t afford to stay too long in the market
Zoran: What you’ve got to be aware of also is that the market or the buyers, like number of the buyers of any business, is finite and it’s much smaller than the real estate market. Everybody who lives needs a house to live in. Not everybody who walks the streets wants a business. Not everybody who wants a business wants your type of business. Not everybody who wants your type of business wants a business where you are located or your size. So the market is much much smaller.
I dare to say. I don’t know the numbers, but I’ve got a feeling that for any business there’s probably about 15 people, and that’s Australia-wide, that could be interested in your business to look at not to buy it. And out of those 15, it’s going to filter it down to a very very small amount of people that will actually make a move for your business. You have to keep that in mind.
You can’t afford to miss any offers and you can’t afford to stay too long on the market because urgency factor goes away from the buyer or they’re really not for it. That business is going to disappear from the market, if it’s been on the market for twelve months. But if the business just comes on the market, and I believe three to six weeks, first three to six weeks, that’s the time that you actually do the deal because the seller doesn’t want to miss out.
If he misses out for one reason or the other, because we couldn’t agree on the price or we couldn’t agree on the terms, if you go back to that same guy or girl six months down the track, the bargaining power is now in their hands, not in the hands of the seller.
Joanna: Yeah. So let’s talk about strategy then. Let’s say a business has gone to market. Maybe A) the buyers aren’t there or B) the pricing strategy has been incorrect. You don’t get a deal in that first three to six weeks. Is your approach then pull it off the market, try and get in say six months?
Zoran: There would be one way of dealing with this. Pull it off the market. Address the issues and then go back to the market right away. Hopefully you do all the preparation. You prepare yourself properly so that doesn’t happen.
Number one issue why people stay on the market. By far, the number one issue why people stay in the market for too long, it’s price. If you price it right, negotiation is much easier.
I’m not saying price it under or below the market value, but price it right. Very often if you price it right, you actually don’t have to negotiate. One thing that people always do is say we’ll leave the room to negotiate. There’s no need to negotiate if the price is right.
Let me explain this to you through one example. Let’s say I’m selling something to you for a hundred thousand dollars, a business or anything for that matter and you really want it. You’re going to try to negotiate and say look I’ll give eighty. The only thing I have to say if the price is right is no, I want a hundred and if you really want this, you will come back and you will pay a hundred thousand dollars.
You’re not going to walk away from something that’s priced right, something that you really want, just because I didn’t give you a discount. You will accept it. But the price has to be right.
Joanna: Tell me in practice how many of your sales then through Xcllusive do you think will go through without a sale price being negotiated? i.e. the sale happens at the list price.
Zoran: Very good question. Look. It is a good question. Every time you negotiate, but not necessarily just the price. Terms can be negotiated as well. Okay.
For example, we got about twenty-seven points of negotiation that we do for every business which is how long the owner is going to stay in the market, how are we going to value the stock or the restraint of trade is going to be and so on. And normally the price agreement is done first and very quickly. So it’s not uncommon that we’re going to agree on the price very very quickly and then spend three to six months negotiating all the other terms.
Now your question of how many of them. Well often price is what we’re asking for by the terms and negotiate it a little bit on the other end. So when you price the business, it’s not just. Well main component is the price. But there’s also what are you offering on top of the price, so what terms or training or how the stock’s going to be negotiated.
I think it’s not just us, but every broker encounter out there, that not all the facts are given to us in advance. So we price the business under the limited information. Then once we go into market and due diligence starts, certain facts of the business are discovered that very often you have to negotiate it no other way but by giving the discount.
That’s another thing where we’re talking about the strategy. Disclose all these issues, disclose all defects of the business at the beginning because something that’s a thousand-dollar problem at the beginning of the deal becomes fifty thousand dollars in the end.
Joanna: Yeah. I’ve certainly seen that many times. I completely agree.
Zoran: So in my opinion, unless everything is disclosed, we should not get into due diligence. One thing that we never do. If everything is run properly, we never negotiate after due diligence.
Due diligence is not there for the buyer to find other reasons to actually drop the price or get the better terms. But due diligence is there to actually prove to the buyer that everything a seller told them until that date is still correct.
Joanna: Yeah, yeah. Sure. And that’s why I guess as advisors in this space, all of us are singing from the same hymn book, which is get your ship in order before you get it on the market or be honest in your disclosures because otherwise, you’ll get hit after DD with requests to drop the price or you might even lose your buyers.
Zoran: Absolutely, absolutely. See how I didn’t answer the question of how many we actually negotiate on the price?
Every deal is negotiated. But not always the price is negotiated.
Joanna: Yeah yeah yeah. I thought I’d let you out of that one Zoran. But I love that you bring it up.
Well look, are there any other tips you have. Obviously, we can hear you loud and clear that your advice is for the sellers themselves that they have to get realistic in the beginning otherwise they potentially opening themselves up for a long painful process as they slowly drop their price down to where the market is.
I guess also for brokers and advisors out there, it’s about the warning against being pressured by your clients into hitting the market with your clients’ determined price rather than a fair market-reflected price.
Some take away tips for business brokers
Zoran: Well yes. Don’t be pressured by the client. But also, don’t use the fact that the client wants money as your opportunity to engage him because he’s going to come to bite you later and I really believe it.
Let’s face it. A lot of that happens in the market. Whose fault is it? Is it the client’s fault or the broker’s fault? It doesn’t really matter because it should not happen because it’s not a good thing for the broker or for the seller.
Joanna:] I guess if you come from the position of playing a straight game in terms of giving realistic advice about the value at market and you find other brokers aren’t. Other brokers are more reflecting what the client’s wishes for value are rather than the reality of the market. I guess that must mean that you lose business to that at times. But does that business ever come back?
Zoran: We lose a lot of deals that way and that’s okay with us. A lot of them do come back. Very often they don’t come back because they are a little bit embarrassed too. Because they don’t want to come back and say you were right, I was wrong. So they’re actually going to look for somebody, a third person. But that whole process actually ends up costing them money with engagement.
Once you’re selling a business, it’s really hard to be focused on running a business so the business doesn’t perform as well. Because it stays in the market for so long, you only get the business off to somebody else when you call them up. We call them strategic buyers. So we say we’ve got a business for you. They say yeah, I know about it. It’s been on the market for a year and a half. Thanks, but no thanks. They won’t even look at it. And there was nothing wrong with that business except that it was overpriced originally.
So yes you do get them back, but I’d rather not get them back. I’d rather that they have a broker really really values them properly and sells them. And it’s better for the whole industry, and it’s much better for the clients that we serve.
Joanna:Well Zoran, this has been a really useful discussion I think for all of our listening audience out there. If any of our audience or accountants want to engage with you to talk to their clients about true valuations of their clients’ businesses or indeed any business owners who are looking to sell there, how do they get in contact with you?
Zoran: Look just google Xcllusive Business Sales and you’re going to find us or google Zoran the business broker and I’ll put up there somewhere.
Joanna: Zoran the business broker. I love it.
Zoran: Look any accountant out there, if you ever have any question about the valuation, if you are doing the valuation that need some comparable sales, need a bit of advice in a particular industry, you’re more than welcome to call us free of charge. We’ll have a bit of a chat with colleagues.
Same with anybody who is thinking of selling business any time in the future who just want to know about the process, by all means call us and somebody from the team will have a conversation and try to answer as many questions as they have. Because better sellers are educated before they go on the process.
I’m not saying go there and read the books and do the courses. But getting information, talk to as many people as you can. Better they can control the process and more they can help through the process because the owner of the business is a big part of selling the business. So you can’t really separate them. So better they know what they’re doing and what to expect, the better the results are going to be for them.
Joanna: Yeah, yeah. Absolutely. Okay. Well that’s a fabulous note to finish it on. Zoran, we’re going to have you back for another episode to talk about the Australian Institute of Business Brokers. But for now, thank you so much for joining us today and we look forward to having you back again.
Zoran: Awesome. Thanks Joanna. I got to go and make some deals. Make some money. All right. Bye.
Joanna: That concludes our discussion with Zoran all about pricing issues in selling a business. Next week, we’re bringing back Zoran for another podcast episode, this time talking about the Australian Institute of Business Brokers or AIBB as they are known in the industry and we’ll just talk all about what AIBB is, what they do and why you should perhaps consider being one of their members or partners.
If you’re interested to learn more business valuation or maybe discuss some pricing issues you are currently facing, you can reach out to Zoran and his team at Xcllusive Business Sales by checking out our show notes at www.thedealroompodcast.com where we’ll link through to their website. There you will also find a full transcript of this podcast episode if you would like to read it in more detail.
I hope you enjoyed what you heard today. If you did, please subscribe to the Deal Room podcast on Apple Podcasts or your other favorite podcast player to get notifications straight to your phones whenever a new episode is out.
Thanks again for listening in! This has been Joanna Oakey and the Deal Room Podcast, a podcast very proudly brought to you by our commercial legal practice, Aspect Legal.
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