Whether you’re a big fish like Facebook assimilating a key rival like Instagram, or you’re a startup looking to acquire the assets of another business, buyouts have a role to play in all sorts of business journeys.
Buyouts tend to be highly complex, involving a mix of financial, human resources, business strategy and PR factors. This article brings together several free online resources on how to buy out a competitor, to help you navigate the process.
Step #1: Make sure it’s right to buy
Like baking dough into bread, buying out a competitor permanently changes the nature of your own business. It therefore pays to study the situation thoroughly before you buy.
Writing for Forbes, entrepreneur Colby Pfund raises some excellent points to bear in mind when considering a buyout. Are you able to streamline and integrate the business with you own? Have you weighed up the extra costs? What do they have that you don’t?
Author and CEO Bill Green also has some useful insight to share on this topic. In an Inc. article, Green urges entrepreneurs to consider:
- What are you really buying in a buyout?
- How will you measure the success of the acquisition?
- Don’t get into bidding wars.
Applying situational analysis techniques to a prospective buyout is a great way to assess its likely business impact.
For instance, SWOT analysis can be used to identify the Strengths, Weaknesses, Opportunities and Threats of the business you are thinking of buying out.
Step #2: Preparation and due diligence
When undertaking a buyout, it is crucial to have the right team in-place. This will likely include:
- An accountant, who can review the financials on both sides of the buyout;
- An attorney, who provide counsel and prepare documents relating to the buyout;
- If you don’t have enough cash, a lender who can finance the buyout;
- A business broker, who will act as intermediary between your business and the competitor.
The next step is to start your due diligence into the competitor. This means a series of checks to ensure everything is as it seems.
Aspects of due diligence include:
- Financial due diligence. Does financial information of the competitor such as income statements, balance sheets and cash flow statements all check out?
- Legal due diligence. Can you identify any hidden risks or potential lawsuits in the competitor’s contracts, such as leases and sales contracts?
- Product due diligence. Are the competitor’s products sufficiently profitable?
Due diligence should continue throughout the buyout, with the most stringent checks made immediately before confirmation of the purchase. Starting due diligence at this early stage, using information in the public domain, could save you time and resources by flagging up serious discrepancies that would rule out the buyout before you progress to negotiations.
Step #3: Make initial contact through an intermediary
Once you have your team together and you’ve done your due diligence, you can move on to some more proactive steps.
First off, you’ll need to find out who owns the business. If the company you’re looking at is EU-based, you can do this by searching the company name on the European e-Justice Portal’s Find a Company service.
Once you’ve found out who owns the competing business, you may wish to make informal contact to find out whether they are interested in selling. When doing so, bear in mind that this could well be an emotional subject for the competitor. Break the ice by suggesting you work together or merge the businesses, rather than mentioning the word ‘buyout’ explicitly.
It may be advisable to make your approach anonymously, via a business broker specialising in your industry. This would enable you to make the competitor aware someone is interested in buying them, without revealing your identity.
Step #4: Send a Letter of Intent for Business Purchase
The next stage is to make your intentions official, by sending the business a Letter of Intent for Business Purchase (LOI). This takes place when both sides have agreed to the buyout in principle, but now require more detailed information.
Read thebalancesmb.com’s guidance on LOIs for full details on what to include.
Step #5: Negotiate and close the deal
The final stages of a business buyout are the negotiation of terms, and closure of the deal.
Axial’s Peter Lehrman has some good advice on negotiation techniques to use when buying a company. He urges businesses to:
- Remember that terms matter, as well as price;
- Know your opposition;
- Know your “walk-away” number.
When all parties are in agreement, you’ll be ready to close the deal and purchase the competitor. This final stage is where cheques are signed, and agreements such as the bill of sale are filled out.
Of course, this is where the really hard work of assimilating the competitor with your own business begins!
We hope this article has given you a good starting point for planning your competitor buyout. Do you have experience of buying out a competitor? Let us know via video interview on LAMA App!