Expert Guide: How to Sell Your Business to a Competitor
Once you let the world know your intentions to sell your business, you will notice that many of your competitors are also interested in acquiring it. Since buying your business would also mean getting rid of a rival company, they even tend to bid higher amounts.
While the offer might seem like a good deal, selling your business to a competitor might take a lot of work, therefore, you need to explicitly grasp how to sell your business to a client before you trust a buyer with your company.
Before you get into the methodology of selling your company, you need to understand why your competitors are showing such interest.
Understanding the Motives of Competitor Buyers
According to Barbara Findlay Schenck, author of “Selling Your Business For Dummies,” not every competitor who shows interest in your company intends to buy it. Hence, you must assess the motives of the competitor company before engaging in any discussion.
There is a chance that the rival company is trying to extract lucrative information from you under the guise of being a potential buyer.
Therefore, to ensure your buyer is trustworthy:
Give the interested buyer a questionnaire to fill
Apart from basic details, ensure it has numerous questions about the competitor company’s past acquisitions and financial position. If the buyer shows no interest in answering these queries, it may indicate they have no real interest in buying your business.
Once you have filtered out the genuine buyers, the next step is to get the best deal for your business.
How to Sell Your Business to Your Competitor
While every business will have its unique selling point, the strategy to sell them remains relatively the same. Here are the steps you need to follow to negotiate an advantageous sale.
Ensure legal protection
When dealing with something as big as a business, word-of-mouth means nothing. You need to ensure every aspect of your company has legal protection so that you are never in a disadvantageous situation.
The best way to sell a business with legal protection includes:
Getting your business professional valuation done
We do not recommend you price your business with your gut feeling. You will either end up underpricing your business or something so outrageous that no one shows interest in buying it.
A professional would appraise your business based on the latest market facts, the company’s historical and projected financial performance, expansion opportunities, and market compatibility.
Use Exit Wise’s Business Valuation Calculator to determine your company’s value in real time.
Implementing non-disclosure agreements (NDA)
As discussed above, some of your rival companies might only be interested in your business’s confidential information. Hence, make every potential buyer sign an NDA before you engage in any kind of discussion with them.
Kindly note that the language used to state the clause in your NDA is extremely crucial, as one can interpret it differently in different states.
Qualifying potential buyers and conducting due diligence
It is not unlikely for a seller to have doubts about their potential buyer’s ability to acquire their business. Should you have such reservations, try to gather information and check the competitor company’s financial limitations to confirm the same.
If the company lacks funds or has an enormous existing debt, you should consider it before negotiating with them.
Controlling the release of information in stages
Although the federal antitrust law limits individuals from sharing specific detailed information, it is best to take additional precautions.
If possible, break the due diligence into parts and impose deadlines for the buyer, compelling them to sign off after the completion of every stage.
For example, you should defer from releasing competitive details about your business until the later stages of the negotiation.
Handle acquisition offers from competitors
The goal is to find the best-suited deal for you. However, this doesn’t always mean the one offering the most money, but the one fitting your business goals.
Here’s how you need to handle the acquisition offers you receive from competitor companies to find your ideal match:
Consult with a business advisor
A professional business advisor would help you review all the offers on your table and segregate the ones that match your desired outcome.
Further, they will support you during the negotiation as they know more about the different nuances of selling your business to a competitor.
Evaluate the buyer's mergers and acquisitions team
The best way to sell your business to a competitor is by controlling the negotiation throughout the process. You can make this happen by evaluating who is sitting across from you on the negotiation table.
Your M&A advisor can help you assess this team and ensure you are the only one steering the wheel.
Negotiate a break-up fee to protect against deal failure
A break-up fee will act as a safety net if the buyer decides not to proceed with the negotiation.
Typically, the break-up fee ranges between 1% and 3% of your deal’s overall value. You can calculate this by adding the amount you spent on all the resources to ensure a smooth M&A process.
Communication strategies during the sale process
How you communicate data during the negotiation process can decide its outcome. Not only do you need to ensure your documents have the correct terminology, but your method of releasing information is also critical. Certain things you need to take care of are:
Announce the sale of your business to employees
Your employees play a crucial role in your business. They have given their time and effort to your business. Hence, it is only fair to inform them about your plans in advance and include their well-being in your M&A contract.
Make sure your buyer knows if your employees will continue working or not. Such information will help the buyer build a new team of employees aligned with their requirements.
Maintain positive public perception
Utilize official announcements and messages to ensure a pristine public impression, as that can also influence your business’ valuation.
Before you disclose your intentions to sell your business, publish case studies, press releases, and posts about achievements to substantiate your brand's high value.
Retain professional support for a successful sale
Individuals experienced in dealing with M&A procedures would ensure a safe and successful sale.
While there isn’t any end to hiring experts for your M&A deal, the following will suffice your needs:
An attorney experienced in mergers and acquisitions
Mergers and acquisitions involve an array of legal formalities, and hiring an expert attorney will ensure you tread through them without any hiccups.
The attorney will draft your NDA contract and also assist you in deciding what information you should release at a given stage.
Moreover, you can ask the M&A attorney to check how many litigations the buyer’s company is involved in. They will let you know if such litigations should be a reason for you to seize the negotiation.
A broker/financial expert
Selling a business is already a complicated endeavor. The fact that your buyer is a competitor only makes matters trickier.
You can effectively navigate these complexities by collaborating with a financial expert or a broker. These individuals know how to use the ongoing trends in the market to their advantage.
Even if you do not know how to sell your business to a competitor, a broker will ensure you get your business’s worth.
Finalize sales negotiations and transition ownership
After you have made sure of the true intentions of your buyer and framed the ideal deal, the last step is to finalize the transition. Discussions like your role and authority over the business post the M&A are done during this stage.
It is best to have the professional experts you have hired to negotiate this last bit and reach a beneficial point for both parties.
For example, you can agree to hold the payment for a set period. The buyer will go through all the transition procedures and test-run your business. Should everything go well, you will receive your payment, and your company will officially become theirs.
Selling your business to a competitor is a layered process that demands substantial time. While there are many advantages, sometimes putting your business up for sale can lead to adverse situations.
Pros and Cons of Selling Your Business to a Competitor
Consider these pros and cons of selling your company to a rival business before you make any permanent decision.
Having your competitor as a buyer is beneficial because they would:
Offer a higher value for your business
They see your business as competition. Hence, they would be more desperate to acquire and control your company than others.
Require less marketing and sales
Unusually, business competitors are already on the lookout for buying rival companies. So, doing as much as putting the word out will bring them your way.
Give access to better resources and expertise
Once merged, you can access exclusive resources of each other’s brands. The buyer would willingly offer you that to ensure the business they bought is bringing them profit.
Open new avenues for collaboration
You can add avenues to collaborate in the future and bring in better revenue based on how you negotiate.
Selling your business to a competitor can also mean they:
Steal your data and use it to their advantage
Some competitors are uninterested in buying your business and want your secrets. If you do not choose your buyer wisely, you may endanger your company with data theft.
Close your business for good
Companies would often buy their rivals only to shut their companies down and monopolize the market.
Let go of your talented employees
If the buyer deems it necessary, they can very well let go of your team and set up one of their own to strengthen authority.
Cause you to face tax implications
You might have to face severe tax implications based on your respective tax jurisdiction and the nature of your sale.
While these cons are very likely scenarios, you can avoid them all by consulting professionals who have dealt with such cases for years.
Frequently Asked Questions (FAQs)
Still have doubts? Here are answers to some of the most frequently asked questions about how to sell your business to a competitor.
How can I approach a competitor to sell my business?
Follow the steps mentioned below to approach a competitor to sell your business effectively:
Get your business appraised.
Make your buyer sign an NDA.
Conduct thorough research on your competitor.
Release information in parts and maintain confidentiality.
Conduct due diligence, but do not share exclusive data.
Hire a professional M&A attorney, broker, and business advisor.
Can I sell a part of my business to a competitor?
Yes, you can sell a part of your business to a competitor. In many cases, business owners can extract more by taking this route. There are two ways of selling our company in portions:
Selling a division or sector of your company
Selling a percentage of your company
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Selling a business can seem promising if you plan to retire or move forward with another venture. However, when your goal is to get the most value for your company, your target buyers are your competitors.
If you have decided to sign an M&A deal with a rival company, take notes from this guide before taking any hasty step. As much as it seems like a lucrative idea, a competitor as your buyer might also become your nightmare.
You need experts to guide you throughout the process to ensure no mistakes are made. So book a call with us today, and let us hire your team of experts so you can focus on your business.