How many times have you heard it said that in negotiating the price of anything whoever goes first loses?  Thousands, I guess.  The idea has been generally accepted in our society and we don’t easily forget it.  After all, it seems to make sense.  Why would you ever set a price if a buyer might come along and pay more than the price you were planning to set?

I must admit the idea is appealing.  Who wants to leave money on the table?  If someone values what you are selling more than you do, why should you deprive them of the right to offer a price that reflects the value to them?  It all sounds so good, how could anyone question it?  Surely there’s some study that supports this well-known proposition. 

As far as I can tell it’s always anecdotal evidence that backs up this well-known proposition.  A story is told, you might even know one yourself, about the seller who got considerably more than he or she ever expected because a buyer was willing to pay more than the normal value for what was being sold.  We tend to remember those stories because the seller seemed to get a windfall.

The “don’t name a price” philosophy is appealing because it is based on greed.  Who doesn’t want to get the most they can get for their business?  Who, at the very outset of a sale, wants to forfeit the opportunity to get an outlandish price?  Who wants to give up on the idea that there may be a competitor, a strategic buyer, a foreign company, or a plain fool who may be willing to pay more than anyone dreamed possible?

It all sounds so good, how could anyone possibly disagree?  Well, I disagree.  Based on my nearly twenty years of experience in negotiating the sale of businesses, I believe “don’t name a price” is bad policy except when negotiating with multiple parties simultaneously, as in an auction.  The trouble with making decisions based on anecdotal evidence is that we tend to remember unusual or appealing stories—the seller who got a windfall because he never named a price—but disregard or forget the typical result—the seller who failed to get a fair price or failed altogether in his or her sales effort because he didn’t send a signal of what he considered a fair price.

I don’t have any statistics to prove it, but my guess is that only one in a hundred offers exceeds a seller’s expectations.  Without any pricing guidance or an auction environment, a buyer typically offers a conservative, if not a lowball price, because the risk of being too high is much greater than the risk of being too low.  If the buyer is too high, he has just committed himself to paying more than was necessary to acquire the business.  If he is too low, he can always increase his offer.  Since there are no other buyers to compete against, there is little risk that the seller will accept another offer or cut off him off from further negotiations.

You might be thinking that “don’t name a price” still makes sense, even if only one in a hundred ultimately offers a higher price.  And you would be correct if there weren’t any negative consequences to such a strategy.  The negative consequences are significant, however.  When you neglect to name a price you pass up a great opportunity to place a value on the business and signal to the buyer your expectations regarding the sales negotiations.  Many studies have shown that people are influenced by anchors without even realizing it.  In one such study, real estate agents who were asked to appraise residential real estate were much more likely to give a higher estimate of value if they were initially provided with a high listing price.  Interestingly enough, those agents claimed that they had valued the property by comparing it to similar properties and had virtually ignored the listing price.  In reality, they were strongly influenced by the listing price.

The other major difficulty caused by inviting a single buyer to make an offer is that it is extremely difficult to recover from a low-ball offer.  If the seller is insulted by the offer, he may lose interest in negotiating further with this buyer.  And even if he is prepared to negotiate further, the buyer will be reluctant to significantly increase his offer, if for no reason other than to save face. 

James Freund, author of Smart Negotiating and renowned attorney with the Skadden Arps law firm believes that a seller should take control of the negotiations by putting a number on the table.  According to Freund, sellers must know their value and be realistic in what they ask.  Setting the price is clearly the best strategy in single party negotiations.  In multi-party competitive bidding, however, setting the price is probably not the best strategy, as we will discuss in a future article.

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