Competitive Tension: What it is, and how to sustain it.

When attempting to sell a company, it will always be better to have a number of potential acquirers interested in your business, submitting competitive offers to give the departing shareholders a ‘choice’ of exit options.

A scenario like the one described above can only happen when there is sufficient competitive tension around the sale of the business. One definition of competitive tension is: “the pressure perceived by potential acquirers of a target company when they are aware that there are one or more other parties simultaneously vying to acquire the same target.” (Source: Divestopedia)

In this blog, we offer some tips and advice on creating competitive tension when selling a business and how to sustain it:

Prepare thoroughly

Serious thought and action should be put into preparing for the sale and in some cases that will require months of activity to ensure readiness. This will involve a significant amount of housekeeping and admin, for example, how reliable and up-to-date are your internal management accounts, should an acquirer ask to see them at short notice?

A well-constructed sale prospectus or information memorandum, which concisely lays out the strengths, and opportunities within your business is also essential. Additionally, any pertinent financial data on the company, such as profit and loss information, and balance sheet items, should also be provided, once an appropriate confidentiality agreement is in place.

This is also when company owners would benefit the most from working with a dedicated sell side advisor, who can offer a structured and reasoned approach to preparing for the sale, as well as assist with understanding the current market and who the key potential acquirers are.

It goes without saying that preparing well will help ensure you engage the right acquirers and keep them at table for the duration of the process.

Create a shortlist of buyers

There simply can’t be competitive tension unless you have a choice of acquirers engaged – this is a fundamental fact when selling. Creating a shortlist of buyers is easier said than done however, given that outside of a few industry giants and a handful of competitors most company owners have no idea how to identify a suitable acquirer for their business.

It is common for attractive businesses to receive unsolicited offers to acquire from other companies, which can be very flattering, particularly if received from a larger, well-known player. Unfortunately, in many cases, the end result is that the eventual sale price is far below both the original offer and the real value of the business, especially with no competitive environment around the sale.

Choosing to deal with only one unqualified acquirer can be dangerous if they are unscrupulous and using their offer simply as a ruse to obtain company secrets, product information, details of staff, suppliers and customer information, with no intention to actually buy the business! This can leave the seller exposed and with a seriously damaged business when the deal fails to complete.

What’s essential here is understanding the marketplace, assessing who has actively acquired and which companies, if any, could have a real strategic reason to purchase. Following this approach a business owner could be confident that they had identified a shortlist of potential acquirers capable of purchasing their company.

Run concurrent, competitive negotiations

Finally, negotiations are where the rubber hits the road, as the saying goes. Sellers that have followed the above approach and have engaged serious buyers with a compelling information memorandum and invited offers, may find themselves in the enviably position of having a choice of competitive offers.

To maintain this tension, all parties, but mostly the seller must act expediently in the negotiation stages. If there is a request for detailed information, the sellers should provide it at the appropriate stage without any delay. Accordingly, if acquirers need to clarify points within their offer, or need to elucidate further on their intentions, then they should provide that information without delay.

Ultimately, this is the kind of environment where multiple offers are likely to be submitted and negotiated concurrently. A skilled negotiator will act on the opening offers of the acquirers to highlight aspects of synergy or future opportunities that will demand a premium valuation.

Finally, the headline offer value merely informs you of the buyer’s intent, if the offer structure is not palatable to the sellers, then a deal is not likely to complete. In this respect, pragmatism will trump a desktop offer structure that does not allow for and consider deeply the needs of the exiting shareholders. ■

If you are an owner or shareholder of a business and would like a no obligation consultation on the sale of your business or would like to discuss our Business Valuation Service please follow the link below:

About Us

As a long-established premium provider of business sale advisory services to UK businesses, EvolutionCBS offers business owners a complimentary and confidential discussion on how their specific objectives could be met and provide pragmatic, practical advice on how to begin preparing both themselves and their businesses for a future sale.

EvolutionCBS works with owners of UK businesses in any sector, finding buyers from around the world through highly targeted research and supporting clients with dedicated Director-led teams, at every stage of their journey to a successful sale.

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