Selling a business to a competitor: why they always pay less

The unfortunate truth… A competitor never pays more for your business.

While there are legitimate reasons for a competitor to have a significant interest in your business and to recognize inherent value, history has taught us that small business acquisitions by competitors generate the lowest transaction value based on price, structure and terms.

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

Many competitors approach these acquisitions as buying a customer list, picking up a few good employees, adding an asset or two, and perhaps establishing a key relationship or territory with a supplier. Some are simply looking 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 third party.

Does a competitor need, want, or assign significant value to the following assets?

Tangible:

• Furniture, fixtures and equipment (FF&E)

• Vehicles

• Inventory

• Real estate

Intangible:

• Customer lists

• Customer contracts

• Systems, processes and intellectual property

• Brand, website domain, phone numbers

• Reputation

• Online reviews

• Supplier supply agreements, license agreements, exclusive territories

• Proprietary computer software

• Trained and on-site workforce

• 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 the assets they do require are valued lower, especially intangible assets.

Therefore, the recommendation for a business owner who is considering a sale and might be having a discussion with a competitor is to develop a list of their goals and objectives when selling the business. Even at the most basic “I want to sell my business for the highest price” level.

Does this mean the highest price with 100% financing/seller profit or is the goal to receive the majority of the proceeds at closing? Goals and objectives can vary considerably among business owners seeking a business sale. Experienced M&A advisors and business brokers are adept at qualifying a buyer who is most aligned with these objectives and the assets being sold.

Various examples of goals/objectives include:

• Get the highest price with a portion of contingent seller financing payments

• Get the highest price with a portion of contingent payments

• Maximize cash at closing

• Seek a way out without continued involvement in the business

• Stay in business somehow with less responsibility and time commitment

Find a buyer who:

• Has adequate funds to close

• Has industry or related experience

• Are local or willing to relocate to be local to the business

• Acquires or leases the real estate as part of the sale of the business

• Does not choose inventory, vehicles or FF&E

• Has the necessary business licenses or requires only minimal training and transition assistance

• Expects 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 vendor reward trips. It is not uncommon for proposals to acquire a competitor’s business to be made. Most of the time, these discussions start innocently enough; a purchase wish is made with floating numbers that sound great to the prospective seller and an NDA is signed. Discussions are held and commercial financial data is provided to the competitor. A subsequent meeting is scheduled and a non-binding letter of intent is received. Due diligence is followed, important confidential information is provided, and an offer very different from what was originally discussed is made. The deal falls apart. The result is a no deal, and unfortunately, a competitor now has highly confidential information about his business. This is the worst possible situation and it 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 made; but simply to highlight the differences in value to be expected and the risks involved in disclosing confidential company information when a competitor is involved.

If it is appropriate for a business to be sold to a competitor, it is essential to have a professional intermediary. Following an established process, providing information in stages, protecting sensitive information, qualifying sincere interests or discovering a fishing expedition are some of the key benefits a broker provides.

Furthermore, it is the broker’s ability to discreetly market the business to many potential buyers rather than dealing with just one candidate that maximizes the value of the transaction. Each confidential marketing program is customized by commitment, but ultimately these programs focus on creating multiple offers through which the best price, terms and conditions can be achieved for the seller.