When and how to sell to a competitor
For many reasons selling to a competitor is often perceived as a risky option. However many cases show that a strategic buyer could put the best deal on the table. But how do you navigate through this tricky process?
John Warrillow founder of the ValueBuilder System recently interviewed Alex Rink, the founder of 360pi, a software application that provided online retailers with competitive pricing information.
360pi grew into a multi-million-dollar company with 40 employees when Rink began hearing his business might be worth as much as 3-6 times revenue.
Rink felt conflicted.
On the one hand, he was excited about the future of the company. They had a Net Promoter Score in the 40-60% range and an annual recurring revenue retention rate of around 90%. They were profitable and growing.
However, by 2017, Amazon was gobbling up 50 cents of every dollar spent online. They had their own price comparison software, so if Amazon became even more dominant, 360pi’s business could be compromised.
Despite how well things were going, Rink decided to sell. He got three offers and ended up selling to Market Track, a competitor with a similar offering. The offer was one and a half times the other offers.
The main reasons they were initially approached were:
- they were already making acquisitions, and so it was part of their strategy to increment revenues in that way.
- they were already a competitor. They already knew them, and they knew what it was like to compete against them. They knew 360pi had superior technology,
- Market Track had a better sales force than 360pi’s did.
Rink’s story includes several critical lessons for aspiring value builders in any industry:
Leave some field to plough: Rink started out selling to online retailers, but he was excited to begin selling to product manufacturers. Rather than attacking the opportunity to sell to manufacturers, Rink pitched the idea to Market Track as a promising new direction they could exploit.
Strategic acquirers pay more: Rink was not entirely happy with his first acquisition offer. Rather than settle, he approached competitor Market Track, which had several synergies to exploit. Market Track had a bigger sales team than 360pi, yet the 360pi product was better. Rink argued that by adding the 360pi to the briefcase of the Market Track salespeople, Market Track could make off like bandits – and therefore, should be willing to pay more for 360pi.
Staged disclosures: One of the dangers of selling to direct competitors is revealing too much. A direct competitor, keen to learn your secrets, could use the veil of an acquisition offer they have no intention to follow through on as a way to learn about your business. To fight against this risk, Rink proposed a staged diligence period where they would reveal increasingly sensitive data the further Market Track progressed in their diligence. The more money Market Track spent on diligence; the more confident Rink felt that they were serious about acquiring 360pi.
Would you like to find out:
- How to approach potential acquirers in your industry without saying you’re for sale.
- The criteria for a “clean offer”.
- How to know what an acquirer would be like to work with before you sign a Letter of Intent (LOI).
- How “The prove it challenge” can make or break an acquisition offer.
- What’s the growth potential of your company?
A company that is attractive to an acquirer, is a company that’s built to sell. Get started with finding out with your Value Builder Score.
To help during COVID, we are also offering a free follow up a one-hour consultation and a full 26-page bespoke written report detailing how to help grow the value of your business.
Zach Dogar
#mergersandacquisitions #businessvaluation #duediligence #covid-19