At first blush, selling a business for a lot more than a proper valuation sounds like a really good thing for a seller, perhaps bad for the buyer, and neutral for the broker. But is this all true?
In the last two entries we discussed the possible impacts on the seller and buyer.
The broker has as many if not more considerations in the too-high price. Perhaps more so than the buyer or seller, the broker has ethics and reputation at hand. Has she misrepresented the value knowingly by willingness to list at a higher than value price. Or, is this merely a strategy to secure a listing and make certain the buyer understands their personal responsibility to understand value?
Is listing for sale the same as selling at a price higher than valuation?
If the business does sell for higher than valuation and then fails, is the broker responsible?
This is all blurry as the value can be somewhat blurry as well. In a recent personal experience a business had been on the market for $770,000 by another broker. That listing expired and I took the opportunity to offer a free valuation in hopes of capturing a listing. My value came in at $710,000, roughly ten percent below the prior list price. Before a decision to list with me the owner had a buyer found during the prior listing, one who had made a full-price offer. This buyer had been struggling with finding financing. Now he had it and the offer went through at $770,000.
The broker involved I knew to be an honorable person. His valuation was likely done in a different means. He did well in the transaction. The business is still operating over a year later.
The former owner is likely feeling quite good about not listing with me at the lesser price.
Would that ten percent differentiation in listing prices (values) made a huge difference for the buyer, likely not. Thirty percent might have.
What would make a difference for the broker is if the business failed. A reputation for bad valuations and selling techniques could begin to build and not only does the business broker have an ethical dilemma but a reputation as well.
This article speaks to how high valuations and resultant too-high selling prices can do damage:
