Asking Price vs. Expected Sale Price: How We Price a Listing

The range

A properly built valuation shows earnings, usually seller's discretionary earnings, times a multiple range sourced from closed transactions in the industry at that size. For a business with $500,000 in SDE in an industry where comparable sales cluster between 2.4 and 3.1 times, the range is $1.2 million to $1.55 million. The middle of the range is where most transactions in that industry close. The top is where businesses with above-average characteristics, clean books, recurring revenue, a management layer, close. The bottom is where businesses with issues close.

The valuation also considers what is called a strategic band above the top of the range, for a buyer who has a specific reason to pay more, such as a competitor who can absorb the customer base without the overhead. Not every business has a plausible strategic buyer. When one exists, it changes the asking price.

Expected sale price

This is the number the seller should plan around. It is the middle of the range for an average business and moves up or down within the range based on the specific strengths and weaknesses. It is the number the net sheet is built on, the number the seller compares to what they need, and the number that decides whether to go to market at all.

If the expected sale price does not work for the seller, the answer is to improve the business before listing, or to accept the number, or to wait. Listing at a higher price changes how long it takes to find out what the business is worth, and nothing else.

Asking price

The asking price sits at or slightly above the top of the range, with room to negotiate down to the expected sale price. Buyers negotiate, lenders appraise, and diligence finds small things. An asking price set at the expected sale price gives the buyer nowhere to go except below it.

Setting the asking price 10 to 20 percent above the expected sale price is typical. Setting it 40 to 50 percent above, because the owner would like that number, produces a listing that experienced buyers skip without inquiring, because they can do the arithmetic from the blind profile and they assume the seller is not realistic.

Round numbers matter less than owners think. $1,450,000 and $1,495,000 are the same listing to a buyer. What matters is that the asking price is within the range a buyer's own math produces.

Why overpricing costs more than underpricing

A business priced right gets offers in the first month, when the listing is fresh and buyers who have been watching the market see something new. Competition among those buyers pushes the price toward the top of the range. The sale closes in a few months and the seller gets the expected sale price or better.

A business priced 40 percent too high gets inquiries from unqualified buyers and silence from qualified ones. After four to six months the seller reduces the price, but by then the listing has been seen by the buyers who were looking when it launched, and a price reduction on a stale listing reads as a problem rather than an opportunity. Buyers who do inquire ask why it has not sold. The seller, now a year into the process and tired, accepts an offer below the expected sale price to be done with it.

Underpricing has a cost too, and it is smaller, because the market corrects it. A business priced below the range gets multiple offers quickly and the competition among buyers moves the price up. The seller may leave something on the table, but not the eighteen months and the discount that overpricing costs.

What the financing does to it

For most businesses the buyer will use an SBA loan, and the lender will order a valuation. If the appraisal comes in below the purchase price, the buyer has to cover the gap with cash or a seller note, or the price comes down. An asking price that is far above what an appraiser will support is an asking price that cannot be financed, which means most of the buyer pool cannot pay it. Pricing within the range is also pricing within what the bank will lend.

When the owner's number is different

Owners often have a number in mind that comes from what they need rather than what the business earns. Retirement, a mortgage, a partner buyout, a round figure that feels right. That number matters, but it does not come from the business. When it is above the range, the honest conversation is about what it would take to get the business there, how long that would take, and whether the owner wants to do it. Sometimes a year of margin work and recurring revenue building gets there. Sometimes it does not, and the choice is between the market price now and a different plan.

A worked example

A business with $480,000 in SDE in an industry where closed transactions over the last three years cluster between 2.3 and 3.0 times, with a few strategic sales above 3.2.

The range is $1.1 million to $1.44 million. The business has clean books, a general manager, 30 percent recurring revenue, and one customer at 18 percent. On those facts the expected sale price is set at about $1.3 million, the upper middle of the range. The asking price is set at $1.495 million, at the top of the range and within the strategic band.

The listing goes to market. Three qualified buyers see it in the quiet period. Two make offers, at $1.25 million and $1.35 million. A competitor approached directly offers $1.42 million. The seller closes with the competitor at $1.4 million after a small adjustment in diligence. The net sheet built on the $1.3 million expected sale price is exceeded, and the seller had planned around a number that turned out to be conservative.

The same business listed at $1.9 million, the owner's original figure, would have drawn none of those three offers. The competitor would have assumed the owner was not serious, the individuals could not have financed it, and after six months the price would have come down to $1.5 million on a listing buyers had already seen and passed on.

Pricing for two markets at once

When a strategic buyer exists, the direct approach to that buyer can carry a different number than the public listing. The strategic is told the asking price and shown the specific reasons the business is worth more to them: the customer overlap, the overhead they can eliminate, the territory. The public listing carries the same asking price but the general buyer is expected to land in the range. The seller has two paths to the top of the range, and the process is designed so that the strategic knows other buyers exist and the general buyers know a strategic may be interested. Neither is told more than that.

Adjusting

A listing that has been on the market for sixty days with qualified inquiries but no offers is priced too high, and the feedback from the buyers who passed will usually say so. Adjusting early, by 5 to 10 percent, before the listing goes stale, preserves the momentum. Waiting six months and cutting 25 percent does not. A listing that draws multiple offers in the first month was priced right or slightly low, and the competition among buyers corrects the second case.

How we do it

Every valuation we produce shows the range with its sources, an expected sale price with the reasoning, and a recommended asking price. The net sheet is built on the expected sale price, so the owner sees what they would keep after fees and taxes before deciding to list. The asking price is set to invite offers from qualified buyers and to leave room for the negotiation that will happen. When a strategic buyer is plausible, we price for that buyer in the direct outreach and for the general market in the public listing, since the two can be different.