Selling Your Business to a Competitor the Smart Way

The time has finally arrived. You’ve spent years diligently building your business, and now you’re ready to reap the financial rewards by exiting. There’s just one wrinkle – your ideal buyer is your own competitor.

While this is a common scenario, it’s not always one that business owners find easy to accept. Handing the keys over to a tough competitor can raise a host of issues not only for sellers but also for employees. Therefore, it’s imperative to walk into the situation fully prepared. Selling to a competitor has its own set of challenges, most notably how do you maintain confidentiality and protect your client base through the disclosure and due diligence. With this in mind, let’s take a closer look at seven key tips for selling a business to a competitor.

Tip One: Be Certain That You’re Truly Ready to Sell

It’s natural for business owners to waiver a bit when it comes time to exit the organization they’ve spent years growing. After all, selling is a mammoth decision that often has profound financial and lifestyle implications. This indecisiveness might cost you a bit of time and money in a conventional sales situation. However, when you’re dealing with a competitor sale, uncertainty can have more serious repercussions. For example, if you begin a transaction with a competitor and later back out, your opponent will likely walk away with sensitive information about your business. This could give them a competitive advantage, especially if you cancel the deal and return to running your company as usual.

Tip Two: If Approached, Be Cautious

If a competitor indicates interest in purchasing your business, you can’t be certain that it’s in good faith. The competitor may simply wish to gather more information in order to gain a competitive edge. Therefore, it’s crucial to protect sensitive information – don’t divulge anything prematurely and make sure you have them sign iron-clad confidentiality agreements before doing so.  You should also spend time assessing their industry position and background.

Tip Three: Properly Value Your Business

Understand the value of your business and try to determine if the competitor is willing to pay for it before disclosing much about your business. Establishing the value of a business is a complex task. Valuations are linked to earnings, business assets and liabilities, tangible and intangible assets, comparable sales within your industry, and a variety of other factors. To arrive at an appropriate figure, it’s necessary to have an appraisal. This assessment will help you substantiate your asking price and ensure that you aren’t leaving cash on the table.  Also, recognize that competitors may realize significant synergies in the transaction which may make your business even more valuable to them.  Try to estimate what this premium should be. 

Tip Four: Negotiate Terms Beyond Mere Numbers

While price may be paramount, there are other terms worth exploring during a sale negotiation to a competitor. How will existing employees be treated? How will any integration occur? Can you negotiate a post-sale consultancy? Do you wish to remain in a leadership role for a short period to help smooth the transition? Sellers may also want to avoid being locked into a long term non-compete clause if they aren’t retiring.

Tip Five: Work with the Right Business Broker or M&A Advisor

Selling a business in a timely fashion at your preferred price is no small task. Valuations are just one piece of the puzzle; sellers also need to understand the dynamics of the market, put together a marketing plan, and negotiate with buyers. Business owners rarely have the repertoire of skills and experience needed to accomplish this on their own. This is why working with the right business broker can be a game-changer. An advisor can walk you through each step of the process, including valuation, marketing, business buyer identification, negotiation, deal mechanics, and more. This is especially critical when competitors are striking a deal, as a broker can help ensure that sensitive information isn’t needlessly exposed.

Tip Six: Ensure That You Remain in Control of the Process

Any complex business transaction is an artful dance between buyer and seller. You have to know when to push, when to concede, and how to gauge the strength of your position. In situations where a competitor is the buyer, it’s even more important to have the upper hand.

Ideally, a seller should wait to be approached by a competitor, rather than making the first move. Sellers should also dictate the pace and timing of the due diligence process, meetings, negotiations, etc. It’s never a good thing to bargain from a position of weakness, and this is especially true when you’re obligated to give a competitor a peek at your most valuable information and assets during the purchase process. Preferably, everything should be on the seller’s terms.

Tip Seven: Keep Emotion Out of the Transaction

This might be easier said than done if you’ve had a contentious relationship in the past. However, allowing a mutually beneficial deal to be derailed over competitive feelings is a bad outcome for everyone. Try to remain as dispassionate as possible and focus on the positive aspects of selling to a competitor – which we will detail for you below.

Why Selling to a Competitor Makes Sense

Closing a deal on attractive terms often boils down to one key thing: The ability to quickly identify a qualified and interested group of buyers. Competitors are natural candidates for a sale because:

  • They’re already intimately acquainted with the industry and the market.
  • They likely have at least a rough understanding of the value of your business.
  • A purchase helps them acquire additional market share and remove a competitor.
  • Synergies are likely to exist between the buyer and seller which makes your firm more valuable.
  • Sellers can rest easier knowing that the buyer has industry experience and is less likely to mismanage the acquisition.
  • Competitors can accommodate a more flexible sale arrangement – buying standalone assets, IP, inventory, etc.
  • Because they own an established business, competitors are less likely to have financing issues.

Ultimately, selling to an opponent can offer significant advantages and provide the best possibility for a fast sale at an attractive price. However, it’s critical to proceed carefully when entering into the process, and we encourage you to give close consideration to the seven tips we’ve outlined above.

The Benefits of Working with VR New Haven

If you’re considering selling your business to a competitor, it’s essential to find the right business broker or M&A advisor to help you navigate the process. These deals can be especially tricky, given the presence of sensitive data, proprietary assets, and more.

At VR New Haven, we have a long and successful track record of helping clients sell their businesses to competitors. Our proven 9 step process can expedite transactions while still ensuring that you receive a fair value for the company you’ve worked so hard to grow.

For more information about our services or to speak with one of our expert M&A advisors, contact us today!

2020-01-21T11:22:45-05:00