How To Sell Your Business to a Competitor
Most small business owners routinely keep an eye peeled on their competitors to ensure they’re playing by the rules and staying ahead of the game. You’ll want to keep that healthy dose of skepticism when your competitors are potential buyers.
While competitors might want to buy your business for the right reasons, they can also use the sale process to gain insider information or trade secrets about your business and products, get a hold of your customer lists, or pilfer your employees. They might even see an opportunity to eliminate the competition by buying your business and closing it down.
While these risks are credible, they should not deter you from considering competitors as prospective buyers for your business. As you’ll see, there are a number of benefits to selling to a competitor, and there are ways to minimize the risks it poses.
Why Sell Your Business to a Competitor?
In a nutshell, selling your company to the competition can be faster, easier, and more lucrative than selling to a buyer from outside your industry or one who is buying a business for the first time.
- Competitors understand your industry and can see the opportunities your business presents without a lot of research, often resulting in a faster sale process.
- Competitors can make use of synergies such as existing equipment, financial systems, and knowledgeable employees, creating attractive cost efficiencies. They might be willing to pay more for your business because it will cost them less to operate it.
- Competitors with a track record of running a successful company are more likely to have the financial and business resources to close a deal with you.
- Competitors will likely need less training to get up to speed once they’ve acquired your company, and you, as the seller, won’t need to spend as much time helping with the transition.
Which Type of Competitor Makes the Right Buyer for Your Business?
The three types of competitors who might buy your business are:
- Direct competitors
- Near competitors
- Indirect competitors
Direct competitors are companies that sell the same or similar products to the same customers your business serves.
Near competitors operate in the same industry with products that target some, but not all, of the same customers. An example might be a furniture retailer and a lighting shop.
Indirect competitors meet the same customer needs, but they do it in different ways. For example, a kickboxing gym would be an indirect competitor of a cycling studio because both provide fitness solutions, though they sell different services.
No one type of competitor is guaranteed to offer you a better sale price, a faster sale, or a less troublesome process. However, each type of competitor has its advantages and disadvantages.
Direct competitors will have the best understanding of your business. They won’t need to be convinced of the benefits your business offers because they already know the potential for sales and growth. But, on the other hand, they already know the weaknesses and trouble spots to watch for.
Near competitors are most likely to continue running your business for the same reasons they purchased it. They want to leverage existing systems like accounting and marketing to increase their sales, and they might be willing to pay more for your business because they won’t have to spend a lot for the additional revenue.
Indirect competitors want to increase sales, but they might need more convincing that your business is the right fit. That could mean more time to close the sale and get up to speed once they do.
If you’re targeting potential buyers, it’s a good idea to start with indirect competitors. These businesses pose the lowest risk simply because they don’t compete directly with you. You can also use indirect competitors as a kind of beta test to polish your sales pitch and iron out any potential wrinkles.
How to Protect Your Business, Your Customers, and Your Employees When You Sell to a Competitor
You can minimize the risks involved in selling to a competitor by putting systems into place before you approach potential buyers.
Get a Business Valuation
Obtaining a valuation from a business appraiser, business broker, M&A advisor, or CPA is a must for any business sale. Still, it's especially important when you are considering selling to a competitor.
When you make the first contact, a competitor might assume that you are desperate and lowball you on the sale price. But even if a competitor approaches you first, you’ll want to have a clear, justifiable selling price in mind to ensure the successful sale of your business.
Create a Signed Non-Disclosure Agreement (NDA)
A non-disclosure agreement, or NDA, is a legal confidentiality agreement that prevents potential buyers from using the information they learn during the sale process in ways other than intended. It protects you and your business and safeguards your intellectual property, trade secrets, and proprietary systems and technologies in the event that the business deal falls through.
A boilerplate NDA won’t do the job of eliminating the risks involved in the sale of a business. You’ll want to create a customized NDA to fully protect your interests, and you might even want to create separate NDAs for especially sensitive information (like intellectual property) or for different stages in the sale process. If buyers’ representatives are involved in the process, you should also consider a separate NDA for them.
Create a Non-Solicitation Agreement
While an NDA safeguards your business information, a non-solicitation agreement ensures that potential buyers won’t actively recruit or hire your key employees or poach your customers or suppliers.
Conduct Due Diligence
Business sale negotiations involve sharing sensitive and confidential information, a risky endeavor under any circumstances. The stakes are much higher when the potential buyer is a competitor, so conducting due diligence is just as important for sellers as it is for buyers.
By conducting due diligence, you can eliminate prospective buyers whose motives are less than ethical and screen potential buyers to determine whether they are both willing and financially capable of closing a deal.
Your due diligence should include not only a review of the prospective buyer’s financial information but also the reasons they want to acquire your company and their plans for the business once the deal closes.
A comprehensive due diligence effort should include:
- Review of the buyer’s financials
- Credit history of the prospective buyer
- Search of public records
- Review of past acquisitions and how the buyer treated the companies it acquired
- Potential buyer’s business know-how and reputation
Use a Breakup Fee
A breakup fee, or non-refundable deposit, is another way to make sure a potential buyer is serious about making a deal with you. While prospective buyers are likely to balk at paying this fee early on in the process, you can set the timing for payment of a breakup fee late enough in the process to ensure that the buyer won’t back out.
Hire an Attorney
An attorney can fill an essential role when you are selling your business by assisting you in the due diligence process. They can offer guidance on the information you’re required to share with potential buyers, help screen buyers to learn whether they have been involved in litigation, and review existing contracts and leases to ensure they’re ready for scrutiny by potential buyers.
Lawyers can also prepare a letter of intent (LOI) or memorandum of understanding (MOU) that sets out the broad terms of the sale and draw up a purchase agreement.
Most importantly, you’ll want an attorney knowledgeable in the laws of your state to draw up a bullet-proof and enforceable non-disclosure agreement.
Make a Plan to Release Business Information in Stages
Buyers will obviously want to examine the inner workings of your business closely before deciding to buy it. While you’ll have to provide serious buyers with detailed financial and business information, you needn’t give away the farm at the outset.
At the start of the sale process, sellers typically furnish buyers with a financial snapshot that provides a sense of the size and profitability of the company without revealing specifics. For example, the snapshot might include revenues and cash flow statements.
Once the seller signs an NDA, it’s customary to release more detailed financial information, such as seller’s discretionary earnings (SDE) statements or EBITDA (earnings before interest, taxes, depreciation, and amortization) statements.
Be certain to mark all documents you share as confidential.
When the buyer and seller have agreed on the broad terms of the deal and signed an LOI or MOU, it’s customary to release more complete financial information, including tax returns, bank statements, contracts and leases, inventory lists, and other details about the business.
It’s best to wait until the deal is imminent or it has closed before releasing highly proprietary information such as customer names, software codes, and trade secrets.
It’s a good idea to build a team, including a CPA, attorney, and business broker, to guide you in releasing information to prospective buyers. These professionals can also set up an online portal or provide an office where buyers can review your sensitive information without copying it or removing it from a designated space.
Telling Employees You’re Selling the Business
The decision over when to tell your employees about a sale involves personal choice, your relationship with your team, and the new owner’s plans for the business.
As a general rule, you shouldn’t announce your plans to sell until a deal is final or close to completed.
Chief among the reasons for waiting is you won’t have much information to answer their questions until the sale process is pretty far along. Employees might choose to jump ship rather than wait for answers, and the loss of team members can hurt the value of your business and even interfere with closing the sale.
You might consider telling key employees early in the process and notifying all others once the deal is completed.
If you do choose to share your plans with key employees prior to the close of the sale, consider offering them a bonus to incentivize them to stay.
When selling your business, don't overlook the option of selling to a competitor - it could be your best bet. Competitors in your industry can result in sales that are faster, easier, and more lucrative than selling to a buyer from outside your industry or one who is buying a business for the first time. Before selling your business to a competitor, protect your business, customers, and employees by developing a solid exit plan.