Obviously, most sellers hope that their asking price is the final selling price. However, studies on the subject reveal that this is not the case. It happens in a few cases, certainly, but in the vast majority of sales, the asking price exceeds the selling price. The two obvious reasons cover almost all of the bases.

1. The seller asks more to begin with, assuming that the buyer will offer less.
2. The buyer offers less, assuming that the above statement is true.

Very few sellers place a price on their business and set it in concrete. The big reason why the price shouldn’t be set in concrete is that there are just too many variables. Some major ones are:

• Is it a cash transaction or will the seller be asked to finance a portion of the selling price?
• Does the buyer have so many stipulations or requirements in the offer that the seller is unwilling to accept them?
• Only the marketplace can really determine a selling price.

When it comes time to sell or even to consider selling their business, business owners are influenced not only by their financial stake in the business, but also by their personal and emotional stake in it. Their business is most likely their biggest asset. They also have usually poured a lot of themselves into building the business. There are, then, some other less obvious factors that should be taken into consideration when deriving an asking price for one’s business. For example, as one expert has pointed out:

• Businesses are bought and sold by people, so non-financial matters, personal issues and motivation can enter into the equation.
• Supply and demand may also play a role, and neither side may be aware of it.
• Buyers buy businesses for different reasons. Someone seeking a job may pay more because they would enjoy working in a particular business as opposed to a buyer who is buying strictly based on the financials. As the saying goes, when a buyer is considering buying a business: “Value is in the eyes of the beholder.”
• Sellers over-estimate the value of the future without understanding that it is the buyer’s time and capital that create the future. As another old saying goes: “The future ain’t happened yet.”
• Business valuations, regardless of who conducts them, are just opinions. As stated earlier, “Only the marketplace can really determine the price.”

A business broker professional is aware of all of these variables and has the knowledge and experience to assist a seller in arriving at an asking price that makes sense for all parties involved.

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How Important Is the Asking Price?

The answer to this question depends on who you are asking. If you’re the seller, you might say that the asking price is too low. The buyer would say, obviously, that the asking price is too high. How can they both be right? Who decides?

Most sellers have an idea of what they want for their business. This figure could be based on their knowledge of the industry and what similar businesses have sold for. It may be, however, based on just a wish.

There is the old, but true, story of the two partners who decided to sell their business. When asked what the price should be, they both responded with the same answer – $2 million. When asked how they arrived at that price, they each said that they wanted to be a millionaire and two times $1 million was $2 million.

Sellers often say that the asking price doesn’t make any difference, since it can always be reduced. They fail to realize that an unrealistic price keeps buyers from even looking at the business. Buyers know that they can make a lower offer, but if the starting point is too high compared to what the buyer considers to be a fair price, he or she will likely question, “Why bother even making the offer?”

Studies using various databases comparing actual selling prices of businesses with their asking prices show that the difference is about 15 percent for small businesses. The larger the business, the smaller the spread. Businesses sold for $1 million or more sold for about 90 percent of the asking price, while smaller ones sold for about 85 percent of the asking price. The important thing to remember is that the data is based on sold businesses only. There is no data, obviously, comparing the businesses that didn’t sell.

Sellers have to remember that starting with too high of an asking price may well prevent a very qualified buyer from even looking at the business. You may know your price is too high and that you will come down, perhaps even significantly, but the buyer doesn’t know that.

What is the right price? A business broker professional has tools to help sellers arrive at a reasonable starting point. There may be comparable market data based on similar sales. There are methods based on the cash flow of the business and a multiple using other business factors such as location, down payment requirements, competition, annual sales variations and other determinants.

Ultimately it’s the marketplace that decides the final selling price. Serious sellers listen to the marketplace. After all, if 10 buyers are willing to pay X for the business and there are no other buyers, the price is X. The seller doesn’t have to accept that price, but he or she must accept the fact that the market will only pay X for his or her business.

Studies of thousands of business sales show that the sales price ends up being, on average, 85 percent of the asking price – so sellers shouldn’t dream of or wish for too much.

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A Business Report Card

All, or at least some, of the following should be considered when attempting to place an asking price on a business. Placing an asking price just can’t be an emotional issue; or as simple as a seller saying to himself: “I want to be a millionaire, so my asking price will be $1 million.” How do the answers to the questions listed below impact or affect the business? Each answer will suggest a plus or minus that will directly influence the asking price.

• Is there a lot of competition?
• Is the product or service exciting?
• What level of expertise or licensing is involved?
• Is the business financeable?
• How volatile is business/customer loyalty?
• How diverse is the customer and/or supplier base?
• How well prepared and reliable are the financial records?
• Is the business dependent on the owner?
• Is the business seasonal?
• How experienced and motivated are the employees?
• Is the work hazardous? Is the work place hazardous? Is the location hazardous?
• Are the length of the lease and the lease terms satisfactory?
• Will the owner stay and train?
• Is too much of the price based on goodwill “Blue Sky”?
• Does the business present an attractive appearance?

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Are Your Independent Contractors Really Employees?

The Internal Revenue Service is going after FedEx in a big way. The IRS claims that the people who apparently own and operate a FedEx Ground route are really employees of FedEx and not independent contractors as FedEx claims. If the IRS wins this battle, it will cost FedEx many millions of dollars, not only in back taxes, but also in state workers’ compensation, federal unemployment, disability taxes, Social Security and Medicare taxes. (Independent contractors pay the entire 15.3 percent of Social Security and Medicare taxes, although they do get credit for half on their federal tax return.)

Businesses like the independent contractor status because it frees the business from the taxes and worker costs mentioned above. The business is free to simply pay the contractors, leaving the independent contractor without the benefits described above. The IRS is well aware that it loses many billions of dollars due to the independent status and it considers many of these independent contractors to be actual employees. Why do employers use the independent contractor status? Simply because it saves them a lot of money. However, it also deprives these workers of the benefits of employee status.
What is the difference between independent contractor status and an employee in the eyes of the IRS? For the official form (Form SS–8, Determination of Worker Status in pdf format) that is submitted to the IRS for a decision on whether the independent contractor is considered an employee by the IRS go to www.irs.gov/pub/irs-pdf/fss8.pdf. There is no charge for requesting a decision by the IRS.

IRS Form SS-8 outlines 32 questions (and 13 questions for service providers or salespersons) that help determine the difference between employee and independent contractor. These 32 questions come under three main categories: Behavioral Control, Financial Control, and Relationship of the Worker and Firm. If an employer controls the independent contractor, tells him or her what to do (and perhaps even how to do it), and makes many of the decisions regarding the work, the “independent contractor” is most likely really an employee.

It might be time to reconsider the status of any independent contractor in your employ. The prudent thing to do, even if you only have one independent contractor, is to make an appointment with your legal advisor.

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A Lease Primer

The following is provided as a simple explanation of common leasing arrangements within a small business transaction. It is not intended to provide legal advice.

The New Lease
A new lease is generally created when the prior lease has expired, or is about to, and when there are going to be substantial changes to the existing lease. A new lease would be executed between the purchaser of the business and the landlord. It is a new document either drafted by an attorney or used in a standard form that is available at stationery stores and in many books. A new lease involves negotiations between the owner or purchaser of the business and the landlord.

The Sub-Lease
A sub-lease is nothing but a lease within a lease. For example, if the seller of a business is permitted to sub-lease the premises, he or she, as far as a new owner is concerned, is the landlord. In this case, the actual landlord is still dealing with the seller and has no relationship with the buyer. Obviously, the seller needs the permission of the landlord or lessor to assign or sub-lease.

The Assignment of the Existing Lease
This is the most common form, allowing a buyer the use of the premises in which the business is located. In an assignment, the seller is “assigning” all rights to the existing lease to the new buyer. Once the assignment is executed, the seller usually has no more rights in that lease. However, in most assignments, the landlord reserves “all rights” in the lease. In other words, the seller, who may be a tenant or an assignee, is still responsible to the landlord if the buyer does not perform.

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