Selling your business can be the most significant opportunity and challenge you face as a business owner. Many sellers struggle to find the right buyer”and to determine whether an interested party is a qualified lead or a poor investment of time.
Many business owners plan to sell their business alone. They may have received interest from a competitor or other buyer and decide to pursue the opportunity at hand. What they may not realize is that negotiating with one party”especially when that party is a competitor”is not always in the seller’s best interest.
Negotiating with a Competitor
Before we discuss the drawbacks of selling your business to a competitor, it’s important to understand the distinction between a direct competitor and a strategic acquirer. A direct competitor produces a product or service that is virtually identical to yours and competes for the same customers in your target market. A strategic acquirer, on the other hand, may operate in the same market or even call on the same customers, but their products or services are not the same as yours. Other times, a strategic acquirer may offer an identical product but does not operate in the same market space.
Direct competitors have a working knowledge of your industry and a transferable understanding of your products or services and your customers. They know your business and understand the market you serve, what it takes to run smoothly, and which investments of resources and capital to make. They also have their infrastructure, workforce, and operations in place. For this reason, they tend to pay significantly less for the acquisition of your business.
Time and again I have seen buyers pay a premium to knowledge they don’t currently possess. If they don’t require your business knowledge, your business has less value to them. Strategic acquirers, on the other hand, will likely require that knowledge to operate the acquired business successfully. They may also be using this strategic acquisition to augment their existing business, enter into a new market, discover process improvements, and of course, gain clients. Similarly, financial buyers or buyers with no previous experience within your market or industry will absolutely require your knowledge, client list, vendor list, and processes to continue a successful operation. In either case, the buyer has a greater need than your direct competitor and will consider the sale at a higher value. And while a higher value is important, also consider that these buyers pose little to no risk of potential damage to your company should the deal fall through.
In addition to short-changing the value of your business, you also open your business to significant risk by selecting a buyer that is a direct competitor. As the deal progresses and you enter further into the due diligence process, your competitor will have access to more and more proprietary information about your business, clients, and operations. And if the deal falls through, that competitor not only has the knowledge that you are for sale but also has unique insights to your business.
While there may have been a confidentiality agreement in place, you are still at risk of a breach or the competitor acting with bad intentions. Consider that a leak of information might be heard by your employees, vendors, and other competitors. Through the due diligence process, you may have disclosed critical information about pricing methodology, client lists, contracts and vendors, management processes, Customer Relationship Management (CRM) systems, marketing strategy, and more. Whether or not you had an operations plan in place before selling your business (and it’s highly recommended that you do), the buyer will likely have figured out these important details.
Negotiating with a Single Buyer or an Employee
There is one key problem when negotiating with a single buyer and that’s the obvious lack of options. While it’s good to have an interested party and worthwhile to pursue it, it’s impossible to know you are getting the best deal when there is only one option on the table.
In some cases, an employee may offer interest in purchasing the company. The challenges with considering an employee buyer are similar to those that arise with a direct competitor. If the deal falls through, the employee may leak proprietary information about the business or announce to others that the business is for sale. They may also become upset with the failed deal and begin exploring other career options. But perhaps even more importantly, the employee may not have the capital to offer the best price, causing you to compromise the value of your business.
Maximizing Your Opportunity
As you consider a buyer for your business, you have to maximize the value that you have worked so hard to create. In most cases, a business with a good reputation and solid financials does not need to sell to a competitor or negotiate with a single buyer. There are almost always other opportunities that an owner may overlook and other potential buyers or private equity firms that may be interested. In order to maximize and understand the true value of your business, you should go to the open market.
A well positioned intermediary or broker who has a deep understanding of the marketplace, business valuations, and deal structures should be able to guide you in the right direction. These professionals can help you navigate all of the opportunities and challenges you face as a business owner and seller and ensure you get the best deal and the best selling price.