Selling Your Business to a Competitor
If you are a business owner, you’ve probably been approached by a potential buyer to sell your business. Should the buyer be your competition, you need to tread cautiously. When a sale to a competitor is successful, it can produce huge gains for both parties. Yet, when the sale to a competitor goes south, it can have dreadful results.
Business owners need to plan for the day they sell, usually three to five years in advance. Ideally, you’ve thought through your plan which includes a structured process that nets multiple buyers bidding for the rights to your company. Should you not offer a planned structured process and instead talk to just one potential buyer, such as a competitor, you are releasing all leverage to that one buyer. Either way, if a competitor is one of the many buyers you engage with in a structured process, or only one buyer that has approached you out of the blue to sell your business, you need to know how to safely interact with your competitor in a potential sale situation.
Disadvantages to Selling to a Competitor
When selling your business, you need to show its “insides.” When the interested buyer is your competitor, this can put you in an uneasy position. Make sure a strong Non-Disclosure Agreement (NDA) is in place. NDA’s can be used in court if you’ve been damaged by intelligence you’ve shared. Make sure the NDA includes returning or destroying information shared should the deal not go through. When disclosed information gets into the wrong hands it can create lost revenue and massive employee attrition.
Proceed with caution and make sure you are interviewing your competitor as much as they are interviewing you. Find out what their motivation is to buy your business. You will be sharing sensitive financial information; you should obtain their financial information, too. Slowly hand over information and wait until the purchase agreement is in place and all contingencies have been met before sharing customer and employee names and company secrets.
If your competitor’s motivation to buy your business is to eliminate you from the market, the buyer may not keep some or most of your employees. They may find multiple labor duplication, giving reason to fire some of your loyal employees. This may not sit well with you. You need to talk through how the company will operate post-closing.
Oftentimes, it comes down to the character of the person you are dealing with at the company and if they are a decent, moral person. Check out your main contact as much as possible. You want to avoid having your competitor “look under the hood” without a serious plan to buy your business.
Advantages to Selling to a Competitor
Selling to a competitor can be a very smooth transition. The competitor knows your industry and may not need you to stay on as long compared to other buyers. Chances are they know your customers and vendors and can quickly connect with them.
If the acquisition of your business by one of your competitors is done properly, it will offer tremendous financial returns for the buyer by quickly increasing revenues and geographic area and improving their employee talent. This should translate to a sizable offer. A competitor is considered a strategic buyer, and strategic buyers often provide the strongest offers compared to financial (such as private equity and family offices) and individual buyers.
The day you decide to sell your business, make sure you’ve given it plenty of thought and have engaged with an M&A advisor to provide a structured process. This in turn will bring you plenty of buyers, some of which may be your competitors. You want to proceed with caution with all buyers, but especially with your competition. If your competitor is sincere in buying your business and they evaluate your business in a morale capacity, you may find they will turn out to be the best buyer for you, your employees, and your business.
This article was written by Sam Thompson, CBI, M&AMI. Sam is the president and founder of Transitions In Business, a Twin Cities based M&A firm that specializes in selling business to business and healthcare, transportation, manufacturing, distribution and construction/trade services companies. Sam is a Merger and Acquisition Master Intermediary (M&AMI) and a Certified Business Intermediary (CBI) who has successfully guided countless business owners through the sale or merger of their company. Prior to becoming a business broker, Sam was a successful CEO and business owner for 29 years before selling his $16 million conference and event management company. If you have questions about this article and would like to connect with Sam click on the link below.
