How much will you offer?
The buyer’s decision to make an offer signals the beginning of negotiations. As a buyer you must determine the terms of your initial offer; how to communicate it to the seller and how to interpret the seller’s response as the threshold for further negotiations.
The most common question asked by buyers is how to calculate their initial offer. There are many factors to consider and some rules of thumb to follow. If the business has strong buyer competition offer 20% below your estimate of value. Offer 25-35% below value if there is little buyer competition or you propose an all cash purchase.
Note that the offer is based on “value” and not necessarily the seller’s asking price (if higher). You must frame your offer based on what the business is worth you even if it is substantially below the asking price. Don’t be intimated by the seller’s asking price, if you consider your offer realistic. Never forget – sellers over price and often have no idea of what their business is worth. On the other hand, Business Brokers offering valuation assistance to sellers listed with them often have an a substantiated
value determined by the Broker. Brokers may also discourage a low offer, suggesting higher offers have
already been refused. That too is unimportant. It may be a bluff to have you raise your offer. Then again, the broker may be unaware of what the seller will accept until an offer is presented. Keep in mind a broker works for the seller and the broker has an obligation to present all offers to the seller.
The danger with too low an offer is that the seller won’t consider you a serious buyer. However, sellers expect offers 15-20% below asking price (assuming the asking price and buyer’s valuation are equal). Within that range a realistic seller will consider your offer worthy of a counter offer.
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