By Edward L. Fixen
At least once a week I talk with the owner of a highly specialized, niche business who is thinking about selling their business. What is particularly interesting is the common perception that the only buyers for niche businesses are competitors in similar niche businesses and that their business would be difficult to sell. In fact, businesses serving a niche market are just as attractive, if not more attractive, to investors and buyers not currently in that niche market and in my experience are often easier to sell than a business in a more mainstream industry.
The basic categories of buyers in the market for an acquisition, including niche businesses, are corporate/strategic buyers, financial buyers (private equity) and wealthy individuals or family offices seeking to own a business. When it comes to niche businesses, the number of financial and wealthy individual buyers interested in a niche marketplace will usually far outnumber the corporate/strategic buyers already operating in that niche market. Additionally, corporate/strategic buyers in related industries but not currently in that specific niche business are also good buyer candidates. As a result, the potential for a niche business to be acquired by someone other than a competitor is fairly high. As with any business, limiting the market of prospective buyers to a portion of the total marketplace will likely reduce the potential to obtain the best price the market would bear.
Further, unless the niche business offers a significant new customer base or market segment that does not overlap with a corporate/strategic buyer, which is less likely in a niche industry, many of the corporate/strategic buyers would be less likely to offer the best price. While a niche business should be of greater value to a corporate/strategic buyer when the acquisition includes acquiring new customers or market segments, it is also very valuable to a financial or wealthy individual trying to gain entry into a niche industry with high barriers to entry. Accordingly, financial or wealthy individuals are just as likely to pay a good price and offer attractive terms to the seller, including continued employment or ownership when desirable.
My firm has represented many businesses with a niche and highly specialized service or product, including vitamin manufacturing, satellite manufacturing, medical equipment manufacturing, specialized medical services, specialty industrial equipment manufacturing and many others. Yet in many instances, the buyer offering the best price and overall deal turned out to be a financial or wealthy individual buyer and not a direct competitor.
One of the main drawbacks when dealing with a competitor that requires even more caution than normal is the issue of confidentiality and disclosure of highly sensitive competitive information. Of particular concern is the issue of disclosing the pending sale of a business to a competitor that might use that information to gain a competitive advantage by gaining competitive knowledge, alerting customers or employees and potentially negatively affecting the value of the business. Obviously, not all competitors would act in such an unethical or illegal manner but the risk of such conduct does require special consideration and treatment when selling any business and particularly a niche business operating in a highly specialized market segment.
Strategies to address competitor confidentiality include screening prospective buyers with the seller prior to releasing confidential information, developing a list of prospective candidates that are unacceptable to the seller based on the competitive risk, have a controlled exchange of info process based on the progress of the deal and initially limiting prospective buyer candidates to non-competitor, financial and wealthy individual buyers. Any or all of these strategies will reduce the risk of disclosing the pending sale to a disingenuous buyer without unduly limiting the ability to obtain a fair market price for a niche business. More importantly and to the point of this article, the market for niche businesses is by no means limited to competitors and it is the niche characteristic of the business that makes it so attractive and valuable to investors and buyers trying to gain entry into that niche market segment.
Author: Mr. Fixen is a Certified Business Appraiser (CBA) and Certified Business Broker (CBB). Mr. Fixen is the President of BusinessQuest, a business valuation and M&A brokerage firm serving small & mid-size, privately-held businesses throughout California and can be reached at firstname.lastname@example.org.