I went shopping for a used pickup truck with my son last week. We walked into the dealership, after spotting a vehicle we’d seen on their website. The truck had low miles, but the price wasn’t listed. We knew, ballpark, what it was worth. We masked-up, walked in, and spoke to the salesman.
When we asked what he wanted for the vehicle, he said, $26,000. And I said, “Oh no, let me give you more than that. You don’t have to lower the price just for us!”
Of course, I didn’t say that. In fact, I bid something even lower than $26,000. Fact is, when a seller makes the mistake of naming a price, the buyer immediately perceives it is the seller’s “stretch number,” and the buyer does everything in his power to get the price reduced.
This is true whether someone is selling a pickup truck or multi-million-dollar lumber dealerships. The seller names a price, and it goes only down from there, never up.
I tell this story because I’m surprised how many sellers we talk to ask us to name the price we’re looking for. Thing is, we never say a price when representing a company for sale. If we did engage in that practice, just like that truck salesman, the price would go down from what-ever figure we named.
Our approach of not naming the price hasn’t stopped prospective buyers from asking: “Say, we sure are interested in that lumber dealership you have on the market. What do you want for it?”
Our response: “You just have to take a shot at what it’s worth to you.”
Buyer: “Oh come now, you must have a price in mind.”
Our response: “We certainly know what it’s worth, but the market sets the price.”
Buyer: “Seriously, you’re not going to say a price?”
Our response: “Seriously. We are never going to say a price.”
Had we named the price, the buyer would have said to himself, “Well, if they say they want $20 million, they mean they will take $18 million. Every seller says a price that’s higher than is reasonable.”
See, the price goes only downward once the seller mentions it and the buyer starts gaming out his bid strategy.
There are two other scenarios to support this strategy of “keeping your cards close to your vest.”
First, there is a type of buyer who has been eyeing a competitor from across town, saying to himself, “If that dealership comes up for sale, gosh I’d like to own it. But if I tell him of my plans, he’ll expect a premium price.”
So, that buyer just sits in wait, biding his time. In that case, the property may be worth more to him as a strategic acquisition, for which he is willing to pay a premium. After seeing the “deal teaser” sent out by the seller’s investment banker, he’ll immediately offer a letter of intent (LOI), with a price that’s attractive enough to make the seller say, “I’m interested in a quick sale. I know that buyer. He’ll take care of my employees and customers. Let’s accept the offer.” Other offers are turned away. (Ideally, of course, there are multiple LOIs, and a controlled auction among them can drive the price up 5% to 15%.)
Second, there is a “pre-empt” offering. This happens when a deal is shopped pre-market, privately, to a small list of potential buyers whose intentions are known to the seller. The deal teaser is not blasted to hundreds of potential buyers. Instead, the teaser goes out to, say, five or six targets, hoping a known buyer will offer a little higher than the going rate for the business, just to take the deal off the market, so that a) a known competitor doesn’t even see the opportunity, and/or b) the pre-emptor wants to avoid potential bidding wars with others that see the same potential.
You’ll notice that in both those scenarios, the seller still doesn’t name a price. There are certainly active discussions with the buyer once they offer a number (e.g. how it is paid, if the seller keeps some shares in the NewCo, and if there is an earnout), but the seller will surely get the highest market price by exercising discipline and keeping his lips sealed until he hears what someone wants to pay.
John Wagner is a managing director at 1stWest Mergers & Acquisitions, which offers a specialty practice in the LBM sector. Reach John at email@example.com