Caution: Do Not Poke the Giant
On the first day of June, both Floyd’s Coffee Shops in Portland, Oregon were busier than usual. The regulars were elbowed out of the way by new customers visiting the store for the first time to redeem their coupon and get $10 worth of coffee for $3.
This tempting offer was made because Floyd’s had been picked as the first-ever Google Offers “deal.” Google Offers is the company’s first baby step into the world of “social buying” style promotions where a special, limited time offer is made by a business hoping that the deal will spread virally and thereby introduce a new legion of customers to their business.
Google, of course, did not invent the deal-of-the-day category; they were goaded into it after their generous $6 billion dollar offer to buy Groupon was turned down.
Now Groupon is starting to feel the pinch after thumbing their nose at one of the world’s most valuable companies. According to compete.com, Groupon lost 28.56 percent of its traffic in August 2011 when compared to the previous month. That was the second month in a row that Groupon’s traffic was down, compared to the almost meteoric rise it had experienced since its launch in November 2008.
I think the moral of the story is to be careful not to over-play your hand when being approached by someone who wants to buy your company. Acquirers usually have deep pockets and, while you may think your business is unique, never underestimate the resolve of a big company with lots of cash.
They do have an alternative to buying you: they can simply compete with you.
Typically when they make the decision to walk away from the negotiation table they do not leave empty-handed. They come away with new-found insight on how you run your business, what works, and what flops; so they have an enormous head start to launch a competitive company.
And it doesn’t just happen in Silicon Valley. Take a hypothetical example of an insurance broker that generates $500,000 per year in revenue, which is more than enough to keep him and his two office staff happy. Then one day a big insurance broker comes along and says they want to buy his book of business and they’re willing to pay one times annual revenue. The broker turns up his nose and demands 1.5 times.
Now the suitor has a choice. They can try and negotiate with the broker, but that would undermine the economics of the model they’ve used to buy hundreds of practices just like his, or they can simply hire someone to start an office to compete with him. Let’s say they pick choice No. 2 and hire a young, aggressive broker. They guarantee her $200,000 a year in the first 12 months on the job while she is building her book of business. You have not only lost the opportunity to sell your business; you’re now competing against a young, motivated rival with a parent company who has an extra $300,000 that they didn’t use to buy you and they’re putting it towards helping your new competitor build her business.
If you’re lucky enough to get approached by a big company who wants to buy yours, remember that they are usually not choosing between buying you or buying your competitor. They are often choosing between buying you or setting up shop to compete with you. As soon as buying you becomes more expensive than competing with you, they’ll compete.
In the case of the deal-of-the day business, there is virtually no barrier to entry. All you need is some e-mail addresses, local knowledge and a sales force willing to call on small businesses—all of which Google has plenty of from initiatives like Google AdWords, gmail and the like. Perhaps next time Groupon won’t push their luck.
JOHN WARRILLOW | Columnist | Sellability
John Warrillow is the author of Built to Sell: Creating a Business That Can Thrive Without You and the founder of The Sellability Score, a cloud-based software company that helps business owners improve the value of their company.