When a big company shows interest in buying your business, it can be easy to get excited about the possibilities. However, as the cautionary tale of Groupon shows, it’s important not to overplay your hand when being approached by someone who wants to buy your company. This is because big companies often have deep pockets and alternative strategies to compete with you, should negotiations fall through.
The Dangers of Overestimating Your Worth
In the case of Groupon, their overestimation of their worth led them to reject Google’s generous $6 billion dollar offer to buy them out. They believed that they were unique and had the upper hand in negotiations. However, Google responded by creating its own deal-of-the-day category with Google Offers, and Groupon’s traffic and stock price plummeted as a result.
How Big Companies Compete
When big companies walk away from the negotiation table, they don’t leave empty-handed. They often come away with valuable insights into how your business operates, giving them a head start to launch a competitive company. This means that you could potentially be facing a new rival with deep pockets and insider knowledge, all because you overestimated the value of your business.
A Hypothetical Example
To illustrate this point, let’s take a hypothetical example of a home security company generating $500,000 per year in profit. A big alarm company comes along and offers to buy the business for four times the pre-tax profit. However, the alarm company owner overestimates their worth and demands six times earnings. The suitor is left with a choice: negotiate with the owner or compete with them.
If they choose to compete, they can hire a young, aggressive manager and guarantee her $200,000 a year in the first 12 months on the job while she builds her business. The suitor now has an extra $1,800,000 ($2,000,000 withdrawn offer minus the $200,000/year salary for their manager) that they can use to help their new competitor build their business. The home security company has not only lost the opportunity to sell its business, but they are now competing against a young, motivated rival with a parent company that has deep pockets.
What to Remember When Approached by a Big Company
If you are lucky enough to be approached by a big company that wants to buy your business, it’s important to remember that they are not choosing between buying you or your competitor. They are often choosing between buying you or setting up a shop to compete with you. This means that you need to approach negotiations with caution and not overestimate the value of your business.
When negotiating with a big company, it’s important to keep the following points in mind:
- Don’t overestimate the value of your business
- Be aware that big companies have alternative strategies to compete with you
- Don’t assume that a big company is choosing between buying you or your competitor
- Remember that big companies often come away from failed negotiations with valuable insights into how your business operates.
Being approached by a big company is an exciting prospect, but it’s important not to get too carried away. Big companies often have deep pockets and alternative strategies to compete with you should negotiations fall through. This means that it’s important to approach negotiations with caution and not overestimate the value of your business. Remember that big companies often come away from failed negotiations with valuable insights into how your business operates, giving them a head start to launch a competitive company. By keeping these points in mind, you can ensure that you make informed decisions when negotiating with big companies.