In order to realistically bridge the gap between the expectation that a business owner has with respect to the selling price of their business to the expectation that a buyer has, a business owner should see a deal through the eyes of the purchaser. A business sale is essentially an exercise of competing perceptions. The perceptions arise when the opposing parties have differing views on how exactly value is defined. This article will explore some drivers that affect the pricing decisions of a business buyer.Buyers calculate payback
The buyer of a small business will look at the purchase price and then do a calculation based on their compensation, debt servicing and overall return on investment. Often this is the key driver for a pricing decision and less effort is spent on irrational motivations such as emotions.Purchasers have a fear sentiment to deal with
Buyers of small businesses do content with their fear of entering into a business and assuming debt and risk. This overall sense of fear is a keen motivator (or de-motivator) for many prospective buyers. It may be easy for a seller to say “don’t worry” but for a buyer being asked to put their nest egg on the line, it is not so easy. Hence, buyers are constantly motivated to push a purchase price down to account for the fear factor.Steep learning-curve for new business owners
A business buyer will have more of a learning-curve than an established owner, obviously. They will need to get to know the customers, systems, staff quirks and may lose some business due to this or unfaithful customers. The first year in the business may not be as successful as that of the current owner. Because of this, a buyer may adjust their purchase price downward to reflect a softer first year in operation.Perception is everything
A seller of a business may over-inflate the value of their business, especially if they have owned it for a long time or if they are the founders. A seller will often see a low selling price as a reflection of their worth, not necessarily that that is where the market is. A buyer will see a company through a more sober lense so a difference in value may arise.Reliability of financial information
If there are many adjustments to a financial statements, such as add-backs for non-business, discretionary expenses, then a buyer may have less faith in the numbers. A general rule of thumb is that the more adjustments needed to the accountant prepared figures means less overall confidence in their credibility. If you own a business try to run your business so that the accountant-prepared books are a true representation of the economic reality.Whether you are a buyer or a seller, the key is to understand that buying a business, unlike most other transactions, can be a process full of emotions and misunderstood perceptions. Try to understand where the other party is coming from in order to come to a mutually agreeable position. Work with a local business broker and experienced deal attorney and accountant to guide you through the process.