Finding the Best Fit Buyer
One of the first questions many business owners face when going down the path of exiting a business is: who should I sell to? An option that often comes up is selling to a competitor. For some, this path feels counterintuitive and like the seller is handing over a hard-earned business to a rival, while for others this type of transaction may be of appeal.
In either case, selling to a competitor also comes with unique risks, such as loss of confidentiality, reduced bargaining power, and the potential for an offer that the seller views as lacking competitive structure. Before making the decision of selling to a competitor, it’s important to weigh the pros and cons carefully.
In this article, we’ll explore the benefits of selling your business to a competitor, the potential downsides and risks involved, and key strategies to protect yourself during the sale. If you’re a small business owner considering a sale, this post will help you make an informed decision about whether selling to a competitor is the right move for you.
Pros of Selling Your Business to a Competitor
1. Speed of Process: Selling a business can take months—or even years—if you’re searching for the right buyer. Not all companies are willing acquirers, but for those that are, competitors can be motivated buyers because they understand the industry and see the value in acquiring your company.
Competitors don’t need extensive education about your business model, thus if they have interest in taking over your company the sale process has the potential to be accelerated. If you’re looking for a quick and efficient exit strategy, selling to a competitor may be a worthwhile option.
2. Unique Perception of Value: Your competitors may view your business as having strategic value. By acquiring your company, they might eliminate a rival and gain market share, expand into new customer segments or territories, or gain access to your proprietary technology, client lists, or operational processes.
Since competitors see value in eliminating competition or acquiring your assets, they may be willing to offer a competitive price for the business. But note that non-cash components, such as earnouts or rolled equity, are often used to structure transactions involving competitors. It’s important to understand the actual cash that will change hands once the transaction is complete, and the details that govern earnouts and rolled equity liquidity.
3. Less Risk of a Failed Transaction: One of the biggest challenges in selling a small business is finding a financially qualified buyer. Many buyers lack the capital, experience, or resources to successfully acquire and run a company. Established businesses that are on sound financial footing should have financing options (i.e. access to debt or equity providers), which can create comfort among sellers that the buyer can produce the cash required to close.
Cons of Selling Your Business to a Competitor
1. Risk of Sharing Sensitive Information Prematurely: One of the biggest dangers of negotiating with a competitor is the risk of exposing confidential company information, such as financials, trade secrets, or customer data.
Potential risks include the competitor learning about components of your business that are considered to be proprietary or the source of a competitive advantage. For instance, your customer or supplier lists will be exposed, technology detail is shared, and full financial transparency is required. If the competitor were to back out of the deal, this newly obtained information could have significant implications on the competitiveness of your company relative to the business that gained insight as a prospective buyer.
To protect confidential information, sellers should require a Non-Disclosure Agreement (NDA) before sharing any confidential data, limit access to sensitive financials and client lists until after an offer is made, and work with an attorney to structure the transaction and to phase the release of information to ensure conviction remains high that a deal can be completed.
2. Reduced Bargaining Power: If you’re only considering one buyer (your competitor), you lose leverage in negotiations. The competitor may present a less-than-compelling offer under the assumption that the seller has limited options beyond the competitor’s bid for your company.
To avoid this, approach any negotiation with transaction goals. These goals may be related to financial outcomes, employee experience, stepping away from the business, or ensuring customers continue to be cared for. By establishing clear goals you can then negotiate with a buyer and make clear what you’ll need to accomplish to complete the transaction. It’s often the case that valuation is just one component that sellers care about, so remain mindful of the unique outcomes you desire in selling your business.
3. Potential Negative Impact on Employees and Customers: If a competitor acquires your business, they may merge operations, which could result in employee layoffs, changes in company culture, and service disruptions for loyal customers.
To protect against negative outcomes to employees and customers, explore employee retention plans with the acquirer and ensure the buyer understands customer expectations and brand value. Communicate openly with your staff once the deal is confirmed.
Is Selling Your Business to a Competitor the Right Choice?
Selling a business to a competitor may be the best approach for some owners, but it’s not without risks.
The pros of pursuing this path are the potential for faster sale process, potential for a higher valuation, and less risk of a failed transaction. While the cons include risk of sharing sensitive information, reduced negotiating leverage, and potential negative impact on employees and customers.
If you’re considering selling your business to a competitor, approach conversations with confidentiality front of mind, consult with a legal advisor regarding the transaction, and be sure your goals align well with the proposed acquirers transaction offer.
For more information on buyer types, sellers can refer to this article.
