What If You Want to Sell Your Business to a Competitor

For some business owners, selling to a competitor is unfathomable.  You mention a competitor as a potential buyer and they begin to foam at the mouth and sputter unmentionables.  Other times, a competitor makes for an interesting potential buyer with lots of synergies and upside potential – usually the ingredients that lead to paying a higher price.  It is important, however, to take some precautions when selling to someone that has a lot to gain, or lose, from your business sale decisions.

Have the Right Non-Disclosure Agreement in Place

A non-disclosure agreement (NDA) or a Confidentiality Agreement (CA) (these phrases are used interchangeably in transactions – don’t be alarmed if you have one and not the other) are signed at the very beginning of a discussion with potential buyers.  They are put in place to make sure that recipients of your information do not use it for any reason other than purchasing the business.  As you might imagine, the process of selling your business means that you will share sensitive information with potential buyers and you don’t want them turning around and using it to compete against you.  Competitors have reasons to participate in sale processes to fish around for information and may not have any intention of actually buying the business.

A good NDA or CA, not only protects the information you share, but it can also have a provision to protect your employees.  This paragraph prevents potential buyers from poaching your employees even if the sale doesn’t go through.  This can be especially important when contemplating a sale to a competitor who theoretically, may engage in the process of looking at a business only to poach key employees.  

Redact Your Information Early On

All buyers, even the competitors, will require that they look at company information before having a serious discussion on value and terms.  Do not be afraid however, to redact or remove certain parts of the information you share with competitors.  For instance, when you provide an organization chart, it is fine to list the position, but not the name in the boxes.  When you list what percent of revenue each customer represents, it is OK to list them as “Customer A, B, C….” and keep a decoder key at your desk for easy reference.  

You will be asked to share all the redacted information eventually, but you can push that to the very end of the negotiation.  You can make a great case that a buyer need not know the name of your salespeople  – only that you have them and they generate this amount of revenue – in order to get to a valuation of the business.

Save Customer Calls/Visits for the Very End

A normal due diligence process will involve some interaction with your customers.  There are ways to limit and structure this (probably enough to justify its own blog), but you should always make customer interactions part of the very end of the diligence period.  And by very end, I mean, the day before you sign the purchase agreement, if possible.  

Interactions with customers for any buyer, but especially for a competitor can be quite risky.  Customers are buying from your business for a reason and they may not want to use the buyers business post-transaction.  This news might startle a buyer and if he or she hears it often enough, may halt the deal.  If a transaction doesn’t go through, you do not want to have introduced your competitor to all your customers.  The only way to avoid this is to have as much of the diligence, legal, and financial bits figured out before you get to the customer communication part.  It should be one of the last things you do.

Learn to Love the People You Have Historically Battled Against

When companies we advise sell to a competitor, the diligence period can quickly turn sour.  It’s hard for a business owner that has competed against someone for years to answer questions about their business, the way they do things, why they don’t do things, why they have chosen this path, etc., without being emotional and sometimes, somewhat snarky.  Questions that a non-competitor asks in due diligence get a perfectly reasonable and calm answer, but if a competitor asks them, they seem like an attack.  

Selling to a competitor means that you will have to put emotions on the back burner.  You will have to switch directions from fierce competitors to two business people trying to get a transaction done.  

Schedule a Communication Plan

A sale to a competitor can be unsettling to the market, to your customers, to your employees, and to your suppliers.  In a competitive sale situation, it works best if the two groups sit down and discuss how they will approach these different groups of constituents.  Have some answers to the most common questions and make time to get answers to those you don’t have readily at hand.  Customers will want to know about pricing, customer service reps, and delivery changes.  Employees will be immediately curious about redundancies and layoffs, and then later, insurance and other benefits.  

Competitors can make excellent buyers.  They often have the very best reasons to pay the most for your business.  If you protect yourself up-front and during the sale process, these can be extremely successful business sale transactions.