Maximising value when selling a business can often mean selling to a customer or competitor and with the current market conditions as they are the return of the trade buyer has made this situation even more likely. Competitors are often the ones who are prepared to pay the best price, but this raises a number of tricky issues and careful management of the sale process is critical to achieving the right result.
Research, research, research
The value of research cannot be underestimated s, with the initial research playing a major role in the sale process and final outcome. The first step when selling a business is to prepare a list of likely buyers. Potential candidates need to be identified by in-depth research of the market the business for sale is currently operating in. This includes speaking to the major players, using the contact networks of the advisors and shareholders and utilising the international networks of corporate finance specialists to determine whether the likely purchaser will come form overseas. The next step is to agree a shortlist of parties to approach.
It is important to understand the strategies of the potential buyers, in particular their M&A plans. Some of this information will already be in the public domain but pre-screening buyers is an important step. The pre-screening process will involve speaking to, or meeting with, potential buyers to reach an understanding of their specific plans. This may even extend to asking questions relating to the area of the business that is for sale though not disclosing who the client is at this early stage
Understanding the key selling points of the business for sale and matching these to the strategies of the potential buyers is critical. There are key questions that need to be addressed at this time. Who is the business worth most to and what are the potential synergies available to the buyer – both sales driven and cost driven? Is there a gap in the potential buyer’s strategy, in terms of their product lines, market segment or geographic coverage that could be improved by acquiring the business that is potentially for sale. Which competitors would find the clients business attractive to buy, perhaps because it would rather own it than compete with it?
Lastly, it is important to understand the key individuals who drive the potential buyers business. Are they longstanding players? Perhaps they have a track record of buying and building businesses. Will they be able to gain support within their organisation to get a deal done?
What we often find is that the ultimate buyer is one of the first names on our list of potential buyers because it tends to be a competitor or a customer who ultimately sees most value in acquiring a business.
When Catalyst worked closely with a heating and plumbing equipment supplier the buyer was its major competitor.
The deal was quite a delicate one because we had to let the other side look at the details of the business but we could not reveal everything in the first instance. It had to be handled extremely sensitively.
The business was finally sold to its major competitor the outcome being a successful result for the vendors of the business who achieved an excellent price. The fit of the business with its major competitor made perfect sense but it was important to ensure that an advisor we understood the sensitivities of the deal without losing the buyer.
Tactics
In a transaction such as this you cant rush in and declare your hand too quickly when you are selling to a competitor and the same applies when selling to a customer. The first step is to prepare a tightly worded confidentiality letter which protects the client from potential buyers using information they learn from their discussions with you. This would include preventing them from using such information to target staff and customers, for example.
it is also imperative to hold back sensitive information until the last minute. Customer information is one such area, as it is vital to head off any attempts by the acquior to approach the customers of the business that is for sale until late on in the sale process. It is also at this stage that it will be important to make sure that there is a synergy between the two businesses. It should be clear that the two cultures are going to be a good fit and that all of the key individuals will be happy in their new roles.
Selling a business to a competitor or to a customer can be highly sensitive and fraught with potential pitfalls but, with the correct guidance from experienced advisors this may be the best route to take to meet the shareholders objectives.