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5 Things to Consider When Your Competitor Makes an Offer

Axial | June 2, 2015

Competition does not preclude cooperation – just ask Apple. Even if doing business with a competitor would be unreasonable, considering rival companies when developing an exit plan can prove profitable. In many cases, competitors are the best option for a selling business owner and ultimately make great acquirers.

However, selling to a competitor involves considerations that could complicate your exit strategy and sale process if not properly accounted for. Below is a look at five points to keep in mind when considering a sale to a competitor.

Competitors can pay – a lot

Corporate acquirers, often also referred to as strategic acquirers, typically pay premiums for their acquisitions because they stand to make surpluses from operational synergies. Adding competition to the equation magnifies such synergies – the acquirer’s bottom line, for instance, will benefit not only from newfound economies of scale, but also increased pricing power.

Keep the premium a competitor should pay in mind when broaching the sale subject. If talks are sparked by a competitor’s offer, evaluate the offer’s merits knowing that it should be considerably higher than offers made in the past by other parties, like private equity firms.

Market signals are real

Of course, you must first know what your business is worth before being able to evaluate the premium an offer contains. Most CEOs hire investment bankers not only to provide that valuation, but also to keep any investigation into a deal’s plausibility covert.

The market will react if it catches wind of a transaction – for smaller private companies, the effects can mean less favorable terms from suppliers and skepticism from customers, among other hindrances. Unlike a CEO, an investment banker, under NDA, can collect information on the industry, market conditions, and potential aftereffects from a sale relatively anonymously. While most banks charge retainers for such services, it pays to have that type of intel.

There are other fish in the sea

Ideally, this information includes data on other potential strategic buyers. Many CEOs, especially those of niche businesses, see a single competitor or two as their only potential acquirers, but options are rarely that limited. In those scenarios, CEOs are typically considering just direct competitors, ignoring those businesses that might compete indirectly.

Indirect competitors might be companies doing similar work in regions with no overlap, or even suppliers that see an opportunity to integrate vertically. Incorporating indirect competitors expands a company’s buyer pool, which in turn enhances negotiating leverage. CEOs willing to pigeonhole themselves into a relationship with one buyer should first consider the leverage they will be ceding later.

Good deal for employees

Of course, considering a large buyer pool is most advisable when the goal upon exit is to get the best price. While competitors will often bring a great price, they can also offer a number of ancillary benefits that satisfy other exit goals.

One such benefit can be a soft landing spot for employees. Operational synergies only exist so long as they are maintained, meaning that acquisitive competitors cannot afford to let their acquisitions falter post-transaction. One way to prevent operational atrophy is to maintain the workforce. Employees might also carry with them best practices that had formerly been competitive advantages at their original company, adding new ideas and efficiencies the competitor had not been exploiting previously.

If not a sale then…

Many deals do not close and the tenuousness inherent to deals done between competitors makes them especially susceptible to derailment. And that’s not always a bad thing.

Engaging a competitor in talks about an acquisition not only forces a CEO to evaluate her own company, but it also provides a uniquely intimate view of a competitor. Knowing the qualities a competitor seeks in acquisition targets, for instance, offers a glimpse into the weaknesses it might observe internally. Likewise, there could be valuable insight to gain from considering the trajectory another company is experiencing and comparing that to your own. Engaging in conversations with competitors solely through an acquisitive lens will filter information out of sight that could be useful if (and when) talks fall through. As a result, staying open-minded and observant through talks with the competition is advisable.

Bottom line

CEOs get calls all the time from competitors interested in acquiring their companies. There’s risk in engaging a competitor in serious acquisition talks – the wrong market signals can irreparably damage aspects of a company’s operations. For that reason, engaging competitors through an investment banker or M&A advisor is imperative.

Yet, with high risk comes high reward. A deal consummated with a competitor can bring financial and legacy-related benefits that deals done with other parties cannot match. Even if a deal does not get done, there is valuable information to be gained from discussing an acquisition seriously with a competitor. It might feel counterintuitive, but sometimes a little cooperation is necessary to remain competitive.

Axial is the deal network for the middle market.

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