The (Pricing) Power of Competition

Pricing Competition
The Power Of Competition

We recently completed a $25 million management led buyout for one of our clients. Even after doing this for many years, I am always surprised by what I learn or what I am reminded of. In this case its, the power of competition. Or more precisely, the pricing power of competition.

Without getting into details, my client was doing a management buyout. In our process, we always send the business plan out to as many financing sources as we can find. This typically means at least 50. In this case, one of the first meetings we had was with a group that had financed another client before. He really liked this company and immediately sent a proposal. Within the first five days of meetings, we had a 'port in the storm' that is someone interested to fund our client.

From there this prospective investor called me repeatedly asking what management thought of his proposal and could he do anything to move it along. I thought highly of the guy and told him, "No. I don't think so. These guys have committed to my process and I will keep you in the loop and they feel they should really talk to others to have a basis for comparison."

Well as time went on this financing got more competitive and this banker got more anxious. Eventually, I had to go to him and say, without revealing any specific information, "we have other offers that are more economical than yours and the difference is significant. Without betraying confidentiality, I leave it to you to decide what to do."

Well this person, went back to his other partners and dropped their pricing by more than 50% of the total financing cost. He argued to his partner that he really wanted this deal and that they had to sharpen the pencil to get it.

In the end they still didn't get it but it reminded me why competition is so important. Everyone is in competition to maximize their value (and minimize their risk) and unless you have the threat of another provider, its tough to seize that. Quantifying such a value is difficult and varies for each transaction but in this case the total cost was lowered by several million simply through competition.

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