You are operating a business and want to expand. Buying your competitor is the fastest way to expand but you know that if you approach your competitor, they may say no, the price may be increased significantly or he/she may think that you are just trying to find out about their financial affairs so that you can raid their customers now that you know their costs and profit margins. How do you over come the reluctance of the competitor?
I have seen businesses use their accountants to help them out. The accountant, if they have a designation (CA, CPA, CGA or CMA) and if they are in public practice have a standard of care which they must provide. In one case recently that I am aware of, the CA signed a confidentiality agreement with the competitor and all financial information was provided to the CA. None of the information was allowed to be shown to the acquiring firm. Only a summary could be provided therefore the amount of information provided was very limited. Any correspondence and analysis with the acquiring company had to be approved by the competitor in advance. By introducing a third party, the acquiring firm would not be able to obtain competitive information and use it to their advantage. The accountant could only review the acquisition from an accounting point of view and would not be able to provide details of any synergies etc.
After the two sides were comfortable, the acquiring company and the competitor’s information was forwarded to the CA. The CA would have to modify the financial statements to make them have the same year end for financial presentation, then do a consolidated financial statements, analyze synergies with the help of both sides, then present the information to the bank for financing. The CA would have to analyze the financial statements and group the similar type expenses into the same category as displayed in the acquiring company.
Using this type of format, both sides were happy that the process could continue with the type of information going to the competitor was restricted. As both sides became comfortable with the situation, more information was allowed to be shared with the acquiring firm.
If you are uncomfortable about contacting your competitor, use a business advisor, an accountant or a lawyer or even a consultant or business broker to approach your competitor and see if they can bring the two sides together to determine if it would be a good fit. Remember, competitors should have economies of scale therefore the amount of goodwill created by the acquisition is always much greater for a company who is a competitor than it is for a buyer of a business who is not in the industry yet.
Synergies can include reduction of administration, more products being sold to the same customers, rationalizing the delivery routes. etc. If you are in the bottled water industry and you have a few customers across the city, if you acquired a competing firm, they would be able to add your customers to their delivery routes. As a result, it could cut down on transportation significantly. If you can deliver an entire truck’s contents at one location vs driving 4 hours across the city to make the same deliver the same quantity of goods, you can reduce the number of vehicles and drivers that you use. Since in the bottled water example, transportation is a major expense of the firms, the amount of savings can be very large by consolidating as many companies as possible. If there are synergies, part of the synergies is factored into the goodwill of the company therefore the purchase price should be higher if a company is acquired by a competing firm. It does not matter if you are making money or losing money, if the synergies are great enough, they can make a company losing money to be instantly profitable. Would a third party pay you a lot for a company losing money, probably not but each situation is different. If you wait too long, the company could losing money could be too far gone to make it worth while.
If you are losing money or are marginally profitable or even just want to retire, maybe you should contact your competitor to see if they want to buy you instead of you waiting until they approach you.