Competitors May Make Great Buyers of Businesses
Most small businesses in South Florida have local, regional, or national competitors. A critical part of the listing process is determining which of these competitors may make good acquirors. Often times, the buyer in such a case are able and willing to close more quickly and at a better price than the typical buyer. Let’s explore this excellent way to sell your business.
Ensure the Competitor Signs and Understands the Non-Disclosure Agreement
- In reaching out to a competitor as a possible acquiror of the represented business for sale, a competent business broker must still ensure that the Non-Disclosure Agreement (NDA) is signed before divulging the actual identity of the business.
- Before the NDA is signed, the competitor should also not be told any confidential information (such as the name of the owner or exact location of the business) that would allow him or her to realize the identity of the business being sold.
- Extreme caution is warranted because an unscrupulous competitor is far more apt and able to steal employees or customers without signing the NDA.
Competitors Frequently Derive Synergies From Buying the Business
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.
Some Synergistic Benefits of A Competitor Buying Your 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 costs of goods percentages through volume discounts and better pricing.
Competitors May Pay Premium Price for Your Business
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 Buying A Home Healthcare Business
- 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 profits during the last 12 months of the seller’s ownership was $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, XYZ Home Health is far likelier to give a better offer for ABC Home Health.
Due Diligence Process 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. Sometimes this can last many weeks, costs thousands of dollars in legal and accounting costs, and will be a very labor-intensive process for the seller.
An Easier Due Diligence Process for Sellers
When the buyer is also a competitor in the same industry, however, the due diligence process can be much shorter and simpler. This is because such a buyer already knows the industry including necessary payroll costs, margins, marketing challenges, and customers. They are simply better buyers because they are more knowledgeable buyers. Avoiding a costly and time consuming due diligence process is thus a major advantage for sellers when selling to an acquisitive competitor.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.