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Business Sale to a Competitor – Why they Always Pay Less

ENLIGN DEAL TEAM | 04/29/2018
Selling your business to a competitor a.k.a. strategic buyer will always yield the lowest transaction value. By:  Michael Fekkes, M&AMI, CBI, CEPA The unfortunate truth… A competitor never pays more for your business. Although there are legitimate reasons for a competitor to have significant interest in your business and recognize inherent value, history has taught us that competitor acquisitions of small businesses yield the lowest transaction value based upon price, structure and terms. While you have built a turn key business that has considerable value, a competitor has most of these organizational/operational elements in place and will view the overall value differently. Many competitors approach these acquisitions as the purchase of a customer list, picking up a few good employees, add an asset or two, and maybe establish a key relationship or territory with a vendor.  Some are simply looking to eliminate a competitor. The bottom line is that they do not need everything you are selling like someone new to the industry.  The worth of this turn key operation is not valued the same from a competitor versus an outsider. Does a competitor need, want, or place significant value on the following assets? Tangible:
  • Furniture, Fixtures, and Equipment (FF&E)
  • Vehicles
  • Inventory
  • Real Estate
  • Customer lists
  • Client Contracts
  • Systems, processes, and intellectual property
  • Brand name, website domain, phone numbers
  • Reputation
  • Online Reviews
  • Vendor supply agreements, licensing agreements, exclusive territories
  • Proprietary computer software
  • Trained and in-place work force
  • Goodwill
Outside buyers will require all of these assets to continue business operations and take the company to the next level.  Competitors will not need all of these assets and those assets they require are valued lower, especially the intangible assets. Therefore, the recommendation to a business owner who is considering a sale and might 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 for the highest price”. Does this mean the highest price with 100% seller financing/earnout or is the goal to receive the lion’s share of proceeds 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 with a portion of seller financing contingent payments
  • Obtain the highest price with a portion of contingent payments
  • Maximize cash at closing
  • Seek an exit with no continued involvement with the business
  • Remain with the business in some capacity with less responsibility and time commitment
Find buyer who:
  • Has adequate funds to close
  • Has industry or related experience
  • Is local or willing to relocate to be local to the business
  • Acquires or leases the real estate as part of the business sale
  • Does not cherry pick inventory, vehicles, or FF&E
  • Has necessary business licenses or requires only minimal training and transition assistance
  • Expects to retain the current roster of employees
Once the toothpaste is out of the tube… Competitors and complementary industry businesses know one another.  They see each other at conferences, industry association meetings, and vendor reward trips.  It is not unusual for overtures to be made about acquiring a competitor’s business.  Most often, these discussions start out innocently; a desire to purchase is made with numbers floated that sound great to the prospective 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 received.  Further due diligence is pursued, significant confidential information is provided and an offer, far different from the one originally discussed, is made.  The deal falls apart.  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 expected 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.  Following an established process, providing information in stages, protecting sensitive information, qualifying sincere interests or ferreting out a fishing expedition are some of the key benefits that an intermediary provides. Additionally, it is the intermediary’s ability to discreetly market the business to many prospective buyers versus negotiating with only one candidate that enables the transaction value to be maximized. Each confidential marketing program is customized per engagement but ultimately these programs are focused on creating multiple offers whereby the best price, terms, and conditions can be achieved for the seller.