Business selling to a competitor: why they always pay less
The unfortunate truth … A competitor never pays more for his business.
Although there are legitimate reasons for a competitor to have a significant interest in your business and recognize inherent value, history has taught us that small business acquisitions by competitors produce the lowest transaction value based on price, structure and the terms.
While you have created a turnkey business that has considerable value, a competitor has most of these organizational / operational elements in place and will view overall value differently.
Many competitors approach these acquisitions as buying a list of clients, hiring a few good employees, adding an asset or two, and perhaps establishing a key relationship or territory with a supplier. Some simply seek to eliminate a competitor. The bottom line is that they don’t need everything you sell as someone new to the industry. The value of this turnkey operation is not valued in the same way by a competitor as it is by a stranger.
Does a competitor need, want, or place significant value on the following assets?
• Furniture, accessories and equipment (FF&E)
• Real estate
• Customer lists
• Customer contracts
• Systems, processes and intellectual property
• Brand, website domain, phone numbers
• Online reviews
• Vendor supply agreements, license agreements, exclusive territories
• Patented computer software
• Trained and on-site workforce
Outside buyers will need all of these assets to continue business operations and take the business to the next level. Competitors will not need all of these assets and those assets they require are valued lower, especially intangible assets.
Therefore, the recommendation for a business owner who is considering a sale and could be entertaining a discussion with a competitor, is to develop a list of their objectives and goals when selling the business. Even at the most basic level “I want to sell my business at the highest price”.
Does this mean the highest price with 100% financing / seller profit or is the goal to receive most of the profit at closing? Goals and objectives can vary considerably among business owners pursuing a commercial sale. Experienced M&A advisers and trade brokers are experts in rating the buyer who is most aligned with these goals and the assets being sold.
Several examples of goals / objectives include:
• Get the highest price with a portion of the seller’s contingent financing payments.
• Get the highest price with a portion of contingent payments.
• Maximize cash at closing
• Look for an exit without continued involvement in the business.
• Staying in business in some way with less responsibility and time commitment.
Find a buyer who:
• Has adequate funds to close
• Has industry or related experience
• You are local or willing to move to be local to the business.
• Acquire or lease real estate as part of the commercial sale.
• Does not select inventory, vehicles or FF&E.
• Has the necessary business licenses or requires only minimal training and transition assistance
• Expect to retain current list of employees
Once the toothpaste is out of the tube …
Competitors and companies in the complementary industry know each other. They are seen at conferences, industry association meetings, and supplier reward trips. It is not unusual for proposals to be made about acquiring a competitor’s business. Most of the time, these discussions start out innocently; a wish is made with floating numbers that sound great to the prospective seller and an NDA is signed. Discussions are held and trade finance is provided to the competitor. A subsequent meeting is scheduled and a non-binding letter of intent is received. Increased due diligence is pursued, important confidential information is provided, and a very different offer is made than what was originally discussed. The deal falls apart. The result is that there is no deal, and unfortunately a competitor now has very sensitive information about your business. This is the worst possible situation and it happens too often.
Selling larger businesses to a competitor is not that unusual, and the focus of this article is not to say that these sales should never be made; but simply to highlight the differences in value that should be expected and the risks involved in disclosing confidential company information when a competitor is involved.
If it is appropriate for a company to sell to a competitor, having a professional intermediary is essential. Following an established process, providing information in stages, protecting sensitive information, rating sincere interests, or discovering a fishing expedition are some of the key benefits that a broker provides.
Additionally, it is the broker’s ability to discreetly market the business to many potential buyers rather than dealing with a single candidate that maximizes the value of the transaction. Each confidential marketing program is personalized by compromise, but ultimately these programs focus on creating multiple offers by which the best price, terms and conditions for the seller can be achieved.