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Business Sale into a Competitor - Why They Always Pay Less

 

The unfortunate fact... A competition never pays more for your business.

Although there are legitimate reasons for a competitor to have the significant interest in your organization and recognize inherent value, history has taught us that competition acquisitions of small businesses yield the cheapest transaction value based upon price, construction, and terms.

While you have built a turnkey business that has considerable value, a competitor has many of these organizational/operational elements in place and will see the overall value differently.

Many competitions approach these acquisitions as the purchase of a client list, picking up a couple of good employees, add an asset or two, and maybe establish an important relationship or territory with a seller. Some are only looking to eliminate a competitor. The bottom line is that they don't require what you are selling like someone new into the business. The worth of this turnkey operation is not valued the same by a competitor versus an outsider.

Does a competitor need, want, or place significant value on the following assets?

Tangible:

Vehicles
Inventory
Real Estate

Intangible:
Customer lists
Client Contracts
Systems, processes, and intellectual property
Brand name, website domain name, phone numbers
Reputation
Online Reviews
The vendor provides agreements, licensing agreements, exclusive territories
Proprietary computer software
Trained and in-place workforce
Goodwill

Outside buyers will need all of these assets to continue business operations and take the company to the next level. Competitors will not require all of these assets and those assets they need are valued reduced, especially the intangible assets.

Therefore, the recommendation of a business owner who is considering a sale and maybe entertaining a discussion with a competitor is to develop a list of their objectives and goals when promoting the enterprise.

Does this mean the highest price with 100% vendor financing/earnout or is the goal to receive the lion's share of profits at closing? The goals and objectives can vary considerably amongst business owners pursuing a business sale. Experienced M&A Advisors and Business Brokers are adept at qualifying a buyer who is most aligned with these goals and the assets being sold.

Several examples of goals/objectives include:
Obtain the highest price using a portion of seller financing determined payments
Obtain the highest price using a portion of contingent payments
Maximize cash at closing
Seek an exit without a continued involvement with the business
Remain with the business in some capacity with less commitment and time commitment

Find the buyer who:
Has adequate funds to shut
Has the business or related experience
Is local or willing to relocate to be local to the Small Business

Doesn't cherry pick vehicles, or even FF&E
Has necessary business licenses or requires only minimal training and transition assistance
Expects to retain the current roster of employees

 

Competitors and complementary business businesses know one another. They see each other at conventions, business association meetings, and seller reward trips. It is not unusual for overtures to be made about acquiring a rival 's business. Most often, these discussions start out innocently; a desire to purchase is made with numbers floated that seem great to the potential seller and an NDA is signed. Discussions are held, and business financials are provided to the competitor. A subsequent meeting is scheduled, and a non-binding Letter of Intent is obtained. Further due diligence is chased, significant confidential information is provided and an offer, far different from the one originally discussed, is made. The result is no deal and unfortunately, a competitor now has highly sensitive information on your business. This is the worst situation possible and happens far 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 done, but merely to highlight the value differences that should be anticipated and the risks involved in divulging sensitive company information when engaging a competitor.

If it is appropriate for a business to be sold to a competitor, having a professional intermediary is critical. After an established procedure, supplying information in stages, protecting sensitive information, qualifying honest pursuits or ferreting out a fishing expedition are a number of the key benefits that an intermediary supplies.

Each confidential marketing program is customized per engagement but ultimately these programs are focused on creating multiple offers whereby the ideal price, terms, and requirements can be achieved by the vendor.