Buying Your Competitor In A Distressed Market

We are in a buyer’s market. That is for buyers that have cash to spend on buying competitors. Before you get itchy palms and call your competitor, think about a few things:

• Does the competitor you may be thinking of buying have a complimentary product or service offering to yours? You should think twice about buying a company that can’t compliment yours in some way. It takes too long to integrate wildly dissimilar companies into yours and it important to look at this aspect of the combined company.
  
• How strong are your competitor’s customers? You may be buying a company that only sells to those accounts you don’t want. Be very careful during your due diligence process because you ideally want to buy company’s that don’t overlap your customer base too much but are good paying customers.
  
• Is there a geographic synergy? If you target acquisition is 100 miles away in a city you don’t currently do business it might make more sense than if the company is in your own backyard. Calculate this into your potential buying price. If your company is in your own marketplace but is struggling, why not just go after their customers rather than take on the potential hassle of taking the whole company.
  
• How do you establish a value? Right now most companies that are being sold are being sold at a significant discount. By that I mean that there may be no money paid for goodwill, especially if the company is struggling.
  
• If you do decide to buy one or more of your competitors, do you buy only their assets or their stock? This is a big issue because if you only buy their assets then you know you won’t face some kind of contingent liability down the road. There are only a few circumstances that might warrant buying the stock of the distressed company. One might be if the owner is going to be an important part of the combined business and you need to assume some of his liabilities in order to make the deal work. This is a case where a good merger and acquisition attorney can help.
  
• When you are doing your due diligence, you may need the help of your CPA to review the books to make sure they are complete and properly represent the business. Cooking books in order to sell a business is a common practice. One way to make sure the books are honest is to ask for a set of the past 3 years or more of tax returns. After you have received them, ask the seller to sign an IRS 8821 form that allows you to obtain IRS copies of the past tax returns. If they don’t match penny for penny, you should doubt any information the seller provides.

Make sure you don’t pay too much for the acquisition. Remember the seller is probably trying to get out of the business with as little business debt as possible. Sometimes if you think the competitor is headed to the bankruptcy court you might consider waiting and buying the assets at bankruptcy. There won’t be many people bidding on the assets and your price will be rock bottom. You can still hire the company’s good people once their doors close.

Most importantly, make sure any potential acquisition you make is complimentary for your company. It is rare when it makes financial sense to buy a company simply because you will be taking them out of the market.

Sam Thacker is a partner in Austin Texas based Business Finance Solutions.

You may contact Sam directly at: sam@lesliethacker.com

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