As a company proceeds to market, the first question almost every buyer will ask is, “What does the owner want for the company?” Almost all professional sellers of businesses refuse to set price. Instead, they require the buyer to set his own price.
Buyers will naturally resist going first, if at all possible. It is uncomfortable. If they start too high, they may pay far more than they otherwise would have had to. If they start too low, they may be dismissed as “bottom-fishers”, not worthy of talking to.
In spite of the clear strategic advantages to making the buyer set price, sellers are often extremely nervous about refusing to give an “asking” price. They feel rude, or disingenuous, in not being willing to tell a prospective buyer what their expectations are. Furthermore, the buyer may react unhappily or angrily, and exert a great deal of pressure to induce the seller to be more “candid”. The seller may be afraid that he will lose a good prospect, and feel almost compelled to throw out a number.
Whoever “starts” the pricing process faces risk; if the seller gives a price, and it is far above the buyer’s expectations, the buyer will be annoyed, feeling that the seller is unreasonable and foolish, and the buyer may withdraw. If the seller is lower than anticipated, he will never even know of his error. The buyer will still complain that the price stated is too high. He will moan and fume, and then move forward to get the seller to drop a little more. If he says, “Okay- done”, the seller would clearly know that his price was too low. Thus, by stating price, all the seller has achieved is the setting of a solid cap on what he might get for his company.
There is no rule – no ethic – no responsibility whatsoever for the seller to preset pricing. Buyers are perfectly capable of competitively venturing price points. Experienced and more sophisticated buyers are quite accustomed to it. They will still need to feel competitive pressure if they are to push the price offered to something near their high end, but they can and will respond.
The payoff for proper handling of the pricing question can be tremendous. We are experienced sellers, having seen pricing on literally hundreds of transactions over the years. Still, we can be and often are surprised. When competition is fierce, it is not uncommon for a few buyers to come in at literally double the pricing of the median on a deal.
The potential cost of error in this area is simply too enormous to dismiss. It pays to hang tough and make the buyer set the price.