Thoughts on how to handle initial conversations with no listed ask price?

November 20, 2023

by a searcher from Northwestern University - Kellogg School of Management in Newtown, PA 18940, USA

I would think owners have a number in their head if operating with a broker, but what strategies can be used in creating a good initial negotiating foundation? Maybe they are shopping for the highest offer with no immediate desire to sell?

In the instance where an owner is not working with a broker, I can believe an owner might not have been giving too much thought to a price but surely there must a range, however impractical.

I have a target, very near my industry so I have a sense of a multiple range but obviously do not want to just start winging out numbers, no matter how fact based.

Thoughts?

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Reply by a searcher
from United States Naval Academy in Philadelphia, PA, USA

As a former owner of a company making ~$5m in annual revenue, I used to get inbounds from PE & searchers weekly and I'd occasionally jump on a call to discuss an opportunity. Almost every other business owner I knew got similar inbound emails or calls. If my business is going well and I have good management in place then I have no reason to sell. Your job is to convince me that now is the best time to do that either because a) the price is right, b) a threat is on the horizon, c) you have resources to grow/compete that I don't have, d) you can solve some unstated challenge I face, or e) some other motivating reason.

Many owners know roughly what their company is worth and they'll generally be of the opinion that it's the best-run or most unique version of that company in the industry, so the value will always be on the upper side of a normal EBITDA multiple range. If there's no broker involved then you have to play the part: Have a conversation about selling the business, discuss the normal EBITDA range for the industry, and show them comps, recent transactions, industry trends, threats to the business, etc. to align the price they have in their heads (they all have one) with the reality of the market.

Reply by an intermediary
in New York, NY, USA

Most businesses have something about them that is unique. Maybe their CIM reads fairly standard for their type or industry, but their geographic location is either a motivator or a deal-breaker for a potential buyer. Possibly their financials are a mess, but they have low customer concentration, a very successful brand and excellent location for a particular buyer... and, given what the market is like these days, seller expectations are often all over the place. Setting an asking price is tough, it is at best an opening bid that can go either way from what I have seen (this is for businesses with EBITDA over $1M). My advice would be to familiarize yourself with the current range of EBITDA multiples for the industry the seller is in, and prepare to start the conversation with those numbers. If you are reaching out to a broker, start by asking to sign the NDA before making any bids. You can ask if the seller has any expectations in mind later if you want to, but ultimately you should look at the CIM for a listed business (regardless of whether there is an asking price or not. Don't let that stop you. Look at the actual business itself), and then make an offer or otherwise discuss price.

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