Customers, Suppliers and Competitors as Buyer Prospects
In the last issue (#21), we gave you details About Middle Market Buyers. This issue examines Customers, Suppliers and Competitors as Buyer Prospects.
"My own business always bores me to death; I prefer other people's." Oscar Wilde
Customers, Suppliers and Competitors as Buyer Prospects
Small business owners often think their customers, suppliers and competitors are likely buyers for their business. In fact, quite the opposite is true. In most instances, those types of entities are not good prospective buyers.
By contacting customers, suppliers and competitors about selling your business, there is a huge risk of a confidentiality breach which has the potential to destroy the value of your business.
Others' curiosity can harm your business
First, business owners have a natural curiosity about other businesses in their industry. If someone contacted you and asked of your interest in learning more about one of your competitors, customers or suppliers, how would you respond? If you are like most business people, you would respond affirmatively, simply out of curiosity, not necessarily out of real interest in making an acquisition. There’s a lot to gain from learning about other businesses and hardly any downside. So will customers, suppliers and competitors express preliminary interest? Yes. But are they really interested in an acquisition opportunity, or are they just naturally curious and want to capitalize on a rare opportunity to learn more about your business? (Hint: it will be the latter in almost all instances.)
The problems with customers as buyer prospects
Think about this. The real value of your business is in the cash flow created by selling to your customers. Those customers are one of your major assets. Many of your customers are already in competition with one another. If you sell your business to one of your customers, can the acquiring company retain your other customers, with whom they are already competitors? Not likely. In light of that, can they afford to pay the true value of your business? Again, not likely.
The problems with suppliers as buyer prospects
It is a similar situation with suppliers, except the problem is their customers, not yours. As a customer of your supplier, if they acquire your business, their other customers (some of which are your competitors) will now view the supplier as a competitor to their business. Can the supplier afford to pay fair value if they lose their own customers as a result of acquiring your business?
The problems with competitors as buyer prospects (possibly your worst nightmare)
Competitors have the potential to be your worst nightmare. If contacted regarding acquiring your business, they will feign interest. Then they can hurt you in several ways. By learning more about your business and its strengths and weaknesses, they can use the information to better compete against your business. With information gained about your employees, customers and suppliers they may begin to poach all three. Consider this: Will competitors want to spend the necessary funds to acquire your business? Or with the information obtained from the evaluation, invest a little more to encroach on your business while growing theirs? There’s another significant downside risk. A breach of confidentiality of your intention to sell can provide significant benefits to your competitors.
The risk of a confidentiality breach
Even when working with qualified advisors who require confidentiality and non-disclosure agreements from prospective buyers, a confidentiality breach is possible. The “typical” individual buyer doesn’t usually stand to benefit from a confidentiality breach. But, because a prospective “industry” buyer communicates on a daily basis with other industry insiders, it only takes a minor “slip-up” to start up the rumor mill, and seldom is it traceable. That’s not meant to question the integrity of your competitors (or even customers and suppliers), but the risk exists even when there is not a lack of integrity.
For most small businesses, the risk-reward ratio of …..
