I run a small commercial landscaping company with about 15 employees. I'm starting to think about an exit in the next 2-3 years. A friend mentioned that a competitor might actually be the best buyer because they can strip out overhead. Has anyone here sold to a competitor? What was that like? I'm worried about them using the due diligence process to steal my client list and then walking away.
Selling
Why competitors are sometimes the best buyers for small businesses
Selling to a direct competitor is risky if you don't have strict NDAs and a clear process. They wiill see your contracts and pricing. I'd recommend using a business broker who can act as a buffer, at least for the initial stages. You need to protect your client list until the deal is signed ngl.
I bought a competitor's business back in 2019. It worked out well because we already knew the market and the clients. We didn't try to steal anything; we just wanted their route density to add to ours. But I can see why you'd be paranoid. Make sure you have a non-solicit agreement in place before you hand over any customer data.
The main advantage is synergies. A competitor can pay more than a financial byuer because they can immediately cut duplicate costs like office staff, equipment, or insurance. If you have a strong book of business, they might value it higher than a random investor would.
What's the business worth? That changes the calculus. Under $1M, competitors are often the only realistic buyers. Over $5M, you might attract private equity.
Probably in the $800k-1.2M range depending on the multiple. I don't think I'm big enough for PE. I'm mostly concerned about my crew. If a competitor buys us, they might just absorb the contracts and lay off eveeryone. I'd like to avoid that.
You can negotiate that. If your team is a big part of why the clients clients stay, make their retention part of the deal. I've seen buyers agree to keep key staff for at least a year as a condition of the purchase.
I've sold two businesses to competitors. The first was a nightmare because the guy was shady. The second was fine. The difference was the lawyer I used. Spend the money on a good M&A attorney who has done deals in your industry.
My accountant told me the same thing. Competitors are usually the best buyers for small businesses because they don't need to learn the industry. They just plug your operation into theirs.
How do you even approach a competitor without sounding like you're waving a white flag? That seems like it would put you in a weak negotiating position.
You approach them carefully. Use an intermediary like a broker or your attorney to make the first call. You don't want them thinking you're desperate.
Exactly. We were approached by a broker representing the seller. It was professional. If the owner had called me directly, I probably would have thought he was in trouble.
That makes sense. So hire a broker for the initial approach. I'm going to look into that. I'm also going to talk to my attorney about the NDAs. Thanks for the input ngl.
Can I ask what multiple you you're expecting? I'm in a similar spot with a small HVAC company.
I don't have a firm number yet. I've heard anywhere from 3x to 4x SDE for service businesses, but it depends on how much the owner works in the business. I'm trying to step back from the day-to-day to improve that.
Focus on recurring revenue too. If you have maintenance contracts, those are worth more than one-off projects. Buyers love that predictable income.