It is not uncommon to be approached by a competitor that wants to buy you out to gain market share. If you have been thinking about selling your business, you may be tempted to start negotiating without really being prepared. Doing this will put you at a distinct disadvantage because you don’t necessarily know the value of your business, your business hasn’t been packaged property to show its value and there is no urgency factor to your competitor to move quickly or give you a good price because there are no other potential buyers in the picture.
So what would be your best next steps?
First, you would be wise to get a business valuation so you understand the market value of your business. This can be done a couple of different ways. You can hire a business appraiser, or you can hire a Certified Business Intermediary (CBI).
Next, as with most buyers, your competitor will likely make a better offer if you are able to present him with a well prepared package that demonstrates the value of your company. This is generally referred to as a Confidential Business Review document. It consists of many section that provide an overview of the business and history of the company, products and services, marketing and customers, the organizational structure, management and employees, historical financials for the past 3 to 5 years, a financial recast that shows the economic value of the business (as opposed to the tax mitigated value), information about the growth potential of the company, and sometimes will also include projections. This document can be compiled by a Certified Business Intermediary (CBI). A business appraiser will not be able to provide this type of document for you.
The third thing you may want to do is to have the Certified Business Intermediary put your business on the open market. This will do three things for you: (1) it will bring more potential buyers to the table, (2) it will create more of an urgency factor for your competitor, and (3) it may serve to drive the price upward.
On the other hand, if your competitor is already highly motivated and willing to move forward quickly, the business valuation may be the only thing you need to ensure you are getting a good price for your business.