How to Sell Your Business to a Competitor
You’ve built a successful company. You have good margins, good revenue growth, and good people in all the right places. Your processes are refined, your vendors are dialed in with redundancies, and your cash flow is positive. Each unit of your business has a highly functional leader and you’ve got them all working to crush the competition. You have a great culture, your company is a leader in the market, and now you’re selling your business?
Sell Your Business to a Competitor for the Greatest Value
It seems counterintuitive at first, but your business is actually the most valuable to someone you’ve been in competition with, directly or indirectly, for years. There are a few reasons for this:
They know the industry
They know your strengths
They know the customers
Their infrastructure can support your processes
But there’s another valuable reason: Your business has strategic value to them. They can monetize your products and services in unique ways that no industry outsider ever could.
When Tell Me More, a language learning software company sold to their competitor Rosetta Stone in 2014, they netted $28 million dollars from the deal. While the exact financials aren’t public knowledge, it is estimated this was a multiple of seven to nine times Tell Me More’s current profits, in a space that typically nets a multiple of four or five.
Getting Ready: Selling Your Business Can be Scary
Let’s get a few things out of the way. In selling your business, you are going to need a great M&A Advisor, one whose team is experienced in the necessary precautions and steps to protect your interests in the process of selling to a competitor. This can include helping you to prepare for the necessary nondisclosure and non-solicitation agreements and advising on which tax documents are required for a business acquisition. An M&A advisor also helps to advise on the appropriate time to disclose or withhold high-risk information about your company in the negotiation process. In some cases, client information and trade secrets can remain withheld until both parties are under contract.
Know Your Ideal Buyer When You’re Ready to Sell Your Business
Beyond navigating technicalities, there are many great reasons to take immediate steps toward knowing the value of your company as it stands today. This is every business owner’s due diligence to ensure the monetary value placed on your company in a negotiation is reflective of its actual worth. The stability of a company’s management is essential to assessing the predictable future growth and profits you or your business’s future owner will net.
To the right buyer— including a competitor— a business is worth far more than some financial buyers would estimate, due to the alignment of interests and offerings it has in inhabiting a particular market.
Strategic buyers will pay you more not just because of impressive revenue figures, but because of the perceived value your products, services, IP, processes, people, and culture add to their business model. In short, your business can fill an unaddressed gap in their product offerings or offer access to consumers in a way the company perceives as valuable.
Asking for more than standard calculations of business value in a negotiation starts with understanding the needs of your competitor closely. You need an answer to your potential buyer’s most pressing question: “Why would I buy this?”
Selling Your Business to the Right Competitor
When AllPaws sold to PetSmart in 2016, the founder was able to generate initial interest in his company because of an advertising deal already in place with its biggest competitor, PetCo. By highlighting this relationship, he was able to recognize PetSmart’s fiercely competitive approach to the market and maximize his valuation. While the actual sale price has not been disclosed, AllPaws founder has shared publicly that it was well over the number he would have expected.
To make a successful sale like AllPaws, start by making a list of your main competitors. Focus on the ones you would consider as prospective buyers. Determine prospective buyers according to three main factors:
1. Who is likely to have the capital (or access) to pay what you’re worth?
2. Whose offerings best compliment your business's unique strengths?
3. Who likes and respects what you’ve done in the industry to consider the conversation?
Through this exercise, you’ll have between three and five options of competitors who would fit your businesses’ idea buyer criteria.
See Your Company Through Your Competitor’s Eyes
Now with an ideal buyer in mind, you can tailor your pitch according to your competitor’s values. At this point, you are building the kind of company that would attract your ideal buyer by creating tailored solutions.
Does your manufacturing capacity, distribution, and vendor relationships need to drive down costs? Do your customers and contracts need to scale up? Perhaps your leadership team and culture are the attractional qualities. Does your Intellectual Property or unique differentiator provide the edge?
Knowing which market gaps your competitor is looking to fill will land you the multiplier your business deserves. This is similar to developing your Value Proposition for your products and services to your customers. Except this time, you are doing it for a competitor. What problem of theirs are you helping solve? The more pressing the problem your company is positioned to solve on behalf of your acquirer, the better they will pay for you to solve it.
When Salem Software identified their ideal buyer— a company called Salem Media— they knew which of their applications would hook their acquirer. By knowing how Salem Software strategically fit into Salem Media’s business model, they were able to get a multiple of five times their current profit in a space where a typical diversified app developing company might net only a multiple of two.
Or consider on a much larger scale, Microsoft’s $8.5 billion dollar acquisition of Skype. Skype had a clear path to growth of both profit and revenue, but Microsoft was willing to pay substantially more because of one strategic problem. Microsoft struggled to motivate users of their older versions of Windows to upgrade, particularly in developing countries. With this acquisition, Microsoft could embed Skype in a new version of Windows and use that as a driver for the upgrade.
When to Sell Your Business: Let Us Help You Get the Best Offer!
If you don’t know what stands out about your company, your acquirers won’t either. But if you do the work to identify your ideal buyer’s needs and differentiate your offerings as unique propositions, get ready for offers to start flooding in. This is the secret behind how business owners sell their companies for significantly more than the average person would perceive their company is worth.
If this sounds complicated or challenging to do on your own—the good news—we can help you know when to sell your business. At Coachwell, we’re experts at conducting business valuations to helping you prepare to sell. We’ll guide you through introducing changes to your company, the right way at the right time—and begin the process of scaling to achieve maximum value from a future buyer.
