December 16, 2022
One of the great myths in selling a business, which applies across all sectors, is that the best person to buy your business from you is one of your known, local competitors. After all, they know your business and its reputation. What could be a better fit than somebody five doors up the road simply taking over your practice, paying you a premium, and you walking away knowing everything is the same as it was before?
Wishful thinking
Unfortunately, this is very often unachievable. There is a rule of thumb that if a local firm or a competitor wanted to buy your company they would approach you directly to discuss. If they don’t contact you directly to discuss a purchase of your business, then it is highly unlikely firstly they are interested, or secondly they would ever have any intention of paying you any money for your business.
This may seem a bit of a generalist comment, but it just applies so often that it is very predictable as to what will happen if you approach any of your local competitors who have not approached you or who have spoken to your business broker about your business.
Cheap recruitment
Firstly, if you approach your competitor, they will immediately know that it is highly possible that there are going to be a number of staff available for employment very shortly, or at least there may well be a lot of staff who are unsettled by your efforts to sell your business.
Staff find out
Which leads me on to the second point, which is that if you approach your local rivals to discuss a merger or sale, then it is highly likely your staff are going to find out you are considering a sale. This is one of the worst things that can happen when it comes to a business sale, because employees do not like being unsettled. Finding out that you are planning to sell the business to someone they don’t know will immediately unsettle them, and an unsettled employee will start to look around at other options to get settled again.
It can jog people into action to make a move they may have thought about some time before, or similarly it may make them think about a move they had not actually considered before.
Useful market intelligence
Thirdly, when you make an approach to the firm, they may spend some time expressing an interest, get all your financials off you, consider your staff list and salary levels, look at your client base, and then come back and tell you that actually your business isn’t worth anything and they’re not interested, or similarly they’ll come back and say that yes they are interested, but your business isn’t worth anything so they’re not going to pay you any money.
In worst case scenarios, we have come across deals where the local rival has in fact required the seller or retiring owner to pay money towards the business to keep it going, rather than the person taking over the business paying any money for it.
Clients like local
When we have these types of difficult conversations with our clients, who tend to be extremely keen on the notion of selling to a local firm, they tend to point to examples of other businesses they know of who have managed to achieve a sale or transfer to a local competitor, and use them to say yes but what about Bloggs up the road, who managed to sell to Jones – how come they managed it, and why do you think it is such a bad idea, if it worked for them?
Other people do it – why can’t we?
You don’t know the circumstances of the other transfer or sale. It is highly likely that one of the businesses had or was about to experience financial or structural difficulties, and was in dire need of disposal quickly, which meant the best option for them was to find anybody prepared to take over the business, and in which case the deal they got wasn’t a deal at all, but more of a fire sale or rescue package.
There are very few actual deals going through with local firms where there is any value in the transaction. I would welcome anybody telling me about deals they have had with local rivals, where a payment has been made for the sale of one of the businesses to the other, because my experience as a broker over time in our sectors is that nobody who sells or merges with a local rival gets paid anything, and the deal is likely to be more of a “doing you a favour”.
In their shoes
You need to view the situation from their perspective and think why someone would want to purchase your business. A local competitor does not need to purchase your business if they’re interested in taking over your clients. They can simply target your clients and take them anyway, without paying you any money for the privilege. Similarly, they can target your staff anyway, without paying you any money. If you give them all the information about your firm, which includes who your clients are, who your staff are, how much you pay them, and every aspect of the structure and formation and operation of your business, you are making their life considerably easier if that is the route they are planning to take.
Summary
So, think very carefully indeed about making approaches to local competitors because you think it is a good idea. I can write this article, and I could probably write it a hundred times, and I’ll still be having the conversation with clients in years to come, where I say I don’t think it’s a particularly good idea to approach your local competitors, and the firm will ask me to make the approach anyway. I will know what’s coming, which is that the local firms will waste my time completely, get as much information as they can out of the business, and then politely decline the opportunity.
Making an approach to competitors to offer your firm for sale rarely achieves the outcome you expect.
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