Competitors Make Great Buyers of Businesses
Most small businesses in South Florida have local, regional, or national competitors. These competitors often make excellent candidates to purchase businesses for sale because they are already familiar with the industry, they are often well funded and have the capability to make acquisitions, and the power of synergies make it easier for a competitor to gain efficiencies and improve the profits of the business being purchased. A critical part of selling a business is identifying which of these competitors may make good potential acquirers. Often times, competitors are able and willing to close more quickly and at a better price than the typical buyer.
Ensure the Competitor Signs the Non-Disclosure Agreement
- Before disclosing confidential listing information about a business to a competitor, it is first necessary to ensure that the competitor completes and signs a Non-Disclosure Agreement (NDA).
- The NDA protects the seller’s confidentiality and must be completed and signed before divulging the actual identity of the business.
- Before the NDA is signed, the competitor should not be told any confidential information (such as the name of the business or exact location of the business).
- Extreme caution is warranted because an unscrupulous competitor is far more apt and able to steal employees or customers.
- Because they are already in the industry and are familiar with the competitive landscape, the sensitive and confidential information of the seller must be protected to an ever greater degree than normal.
The Power of Synergies
Synergies are cost-saving and profit-enhancing benefits to a buyer from purchasing a business in its same industry. Much has been written about the synergistic benefits of cutting costs and increasing profit margins by absorbing the seller’s business into their own operations. The overall effect of synergistic cost-savings and profit enhancements from buying a competitor makes a business transaction more attractive from the buyer’s perspective. This should increase the purchase price of the business.
- Save overhead such as rent by moving operations into the buyer’s current space.
- Save payroll merging administrative duties of the seller’s company into the buyer’s company.
- Save marketing expenses by the power of leveraging a higher sales base.
- Increasing margins by reduced cost of goods percentages through volume discounts and better pricing.
Competitors May Pay Premium Price
Because of the aforementioned synergistic benefits to the buyer of acquiring a competitor, such a buyer may frequently pay a premium price for the business. If the buyer can be persuaded that their profits after the sale will be significantly above the profits that the seller derived from the business, then they will be more likely to pay a premium for the business.
An Example of Competitor Benefitting from Synergy
- Let us assume that a home healthcare business (ABC Home Health) in South Florida is listed for sale at $600,000.
- Let us also assume that ABC Home Health’s adjusted owner benefit during the last 12 months of the seller’s ownership is $200,000.
- Now let us assume that XYZ Home Health (a competitor in South Florida) wishes to purchase ABC Home Health.
- The broker then shows XYZ Home Health that its profits will be increased by $50,000 per year from the synergistic benefits of rent, payroll, and marketing.
- As a result, the adjusted owner benefit to XYZ Home Health from owning ABC Home Health will be $250,000 per year after the acquisition.
- As a result, XYZ Home Health may be persuaded to pay a premium price for ABC Home Health.
Due Diligence in Mergers and Acquisitions by Competitors
Once the outlines of a deal are agreed upon in a purchase agreement or letter of intent, the buyer and seller will go through the formal due diligence phase. This process involves an in-depth review of the financials such as tax returns, profit and loss statements, bank statements, insurance records, and payroll records. Often this process can last many weeks, costs thousands of dollars in legal and accounting costs, and can be a very labor-intensive process for the seller.
Easier Due Diligence Process for Competitors
When the buyer is also a competitor in the same industry, the formal due diligence process is often much simpler. A competitor is unlike most other buyers because they already knows the industry. A competitor will know the necessary payroll costs, margins, marketing challenges, and customers prior to going through a formal due diligence process. Thus a competitor often does not need the same level of granularity for every facet of a business since they are so familiar with how the business actually operates. They are simply better buyers because they are more knowledgeable buyers.
Avoiding a costly and time consuming due diligence process is just one potential advantage for sellers when selling to a competitor. A competitor is often more likely to pay a premium price for a business because of the powers of synergies. As long as the confidentiality of the sale is carefully maintained, a competitor often makes an excellent candidate to purchase a business in South Florida.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.