Do you want to exit your business and you are considering selling to a competitor? If YES, here is a complete guide on how to sell your business to a competitor.
Deciding to sell off your business is never easy. Maybe you are doing it because your business is failing and you will like to exit the business before things get too bad. Or it may be because you will like to try something new such as retirement or even venturing into a new business.
No matter what your reasons may be, the fastest way to strike a deal is to sell the business to one of your competitors. It may seem like a strange idea or a bitter pill to swallow, but it would pay off more than you think.
Even though some people may think that selling your business to a competitor will be exactly the same as any old business sale, selling a business to a competitor takes a unique kind of due diligence. And if you have never gone through this process before, there are certain information you need to arm yourself with.
Even though it sounds farfetched, competitors can make great buyers of businesses. For starters, you can easily identify and find them. On the other hand, they may also be looking to either buy your business at a rock-bottom price or simply look over your proprietary data to gain market intelligence. As such, protecting yourself is key when negotiating terms.
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Types of Business Competitors
In business, there are usually three types of competitors that exist. They are;
- Direct competitors: these are competitors that are in the same market and line of business as you are. You cater and compete for the same customers.
- Indirect competitors: these competitors only share a little bit of the market with you.
- Near competitors: these types of competitors utilize a different section of the market than you.
The type of competitor you will choose to sell your business to will depend on a variety of factors. Most times, business owners will prefer to sell their business to near competitors because they feel that they are not typically out to hurt their business as opposed to the other two types of competitors. Regardless, you must always take precautions when selling to any type of competitor.
Advantages of Selling your Business to a Competitor
As someone who intends to sell a personal business, you probably do not want to spend the next several years trying to market your business with the hopes of finding the right buyer. If you want to easily find qualified candidates to buy your business, you should start with your competitors. They are the most qualified buyers that you’re ever going to find.
Your competitors are already in the business and have verifiable finances and a vast reputation in the business community and as such, you will not have any hassles conducting a credit or reference check on them.
In addition, by selling your business to a competitor, you will be guaranteed that your business is in capable hands because they already have a similar undertaking of their own in the same industry that they are running.
So, they know the ins and outs of the market and how to bring in more customers. That way, you can be sure that you’re leaving your business with a buyer who isn’t going to ruin it as soon as you leave.
It is good to note that selling your business does not necessarily translate into selling the whole business. At times, a business owner may want to sell their inventory or asset to a competitor in order to liquidate quickly. These kinds of deals are advantageous to your competitors because it is cheaper for them and it benefits your business tremendously.
They don’t have to go through the hassle of purchasing the entire company first just to obtain the inventory or money-making assets. As for the owner, they still get to keep their business and can implement a new strategy toward making it successful again while retaining their customers.
If your business has proven to be profitable, competitors will pay more for it than a third-party buyer because they will have a better appreciation of what you have to offer. Also, competitors typically have no problems obtaining loans to purchase other businesses. Sometimes they will even have the cash available to purchase the business outright.
This means the owner doesn’t have to worry about seller-financing their business to a third-party buyer who may or may not follow through on the deal in the long run. The owner can just leave the responsibility of their business behind quickly rather than stay attached to the company for the duration of the financing contract.
The only time when a competitor may want to make monthly payments is if they’re only purchasing a portion of the business (i.e. assets) rather than the whole thing. But even if this were to be the case, you can be sure that the competitor will honor their agreement because they want to protect their credit rating and reputation in the industry.
The Risks Involved in Selling your Business to your Competitors
Even though selling your business to a competitor has a lot of advantages, it is not without risks. One of the major risks you will face is the fact that buyers will make information requests. This information typically pertains to specific information about the stakeholders of your business. They may want to obtain information that is related to company patents, employees, or even the names of customers.
These types of information are highly sensitive in nature and can be detrimental when they get out especially when a competitor gets his or her hands on it. It is not unheard of for a competitor to pretend that they are interested in buying a business when all they have in mind is to get their hands on valuable information.
Once this happens, they will likely back out of the deal and take your information along with them to use for their own benefit. You certainly wouldn’t want this to happen because it could make your competitors stronger and your business weaker. Then, you’ll never be able to sell your business to anyone.
In order to surmount this, you should create a non-disclosure agreement (NDA) for your competitor to sign before releasing any sensitive information to them. You have to make sure that the non-disclosure agreement is properly worded so as not to give your competitors any loophole to exploit.
To this effect, you will need the help of a lawyer to draft an agreement and make sure that your interests are protected as much as possible from the competitor stealing your information and using it for their own benefit.
In reality, during the process of negotiation, you can never really protect yourself in totality. This is because buyers will always find ways to work around a non-disclosure agreement that allows them to indirectly use your information for their own benefit. Again, this is why you’ll want to ask the right questions prior to disclosing any information to the buyer.
Make sure you understand their reasons for requesting such sensitive information from you. Although they could always be lying, most of the time they’ll be honest if they are from a reputable company, especially one that’s bigger than yours.
Sometimes, a competitor can just buy your business and close it down, thus eliminating their own competition. Now you might wonder why they wouldn’t just run it themselves and make more money. What they would usually do in this situation is just rebrand your company with their own brand.
If you own any physical retail locations, for instance, then all of those locations would end up with the competitor’s brand name slapped on them. If not, then the competitor may just take your clientele list and inventory while dumping everything else and shutting down the company. This may not bother you if it’s just a small business you’re selling and you got a good price for it.
But if you have an emotional connection to the business you’re selling, then you may want to ensure that the competitor isn’t going to close the business down. You could even have these terms emphasized in the purchase agreement so that the competitor would not be allowed to shut down the company if they acquire it.
How to Sell your Business to a Competitor in 4 Steps
1. Identifying Competitors: the first step towards selling your business to a competitor is to first identify the competitors that you have. Competitors are of three types; direct, indirect, and near. You have to research the various types of competitors that your business may have and then come up with a list of competitors who may be interested in buying your business from you.
2. Valuing Your Business: When you have a broad marketing campaign, the hope is that you’ll be able to get an accurate price from the competition in the market. However, if you should first meet your competitors without first accurately finding out the value of what you have, you can end up selling it for less than what it is worth. In that vein, the importance of knowing the value of your business cannot be overemphasized.
3. Protecting Your Business: at times, it can be difficult to judge if a competitor wants to actually buy your business or if they just want to have access to sensitive information such as your customer list, so judiciously releasing your sensitive data is a good strategy.
Other than a casual discussion, it’s best to say little, if anything, until you have a confidentiality agreement in place that protects your information.
Really sensitive data, like an employee, vendor, and customer lists or projections, strategies, and detailed financial data, shouldn’t be shared until you have a signed purchase agreement. Even then, controlling the buyer’s due diligence will help you to protect your data, just in case.
4. Consummating the Sale: There are a few different ways that you can sell your business to a competitor. Some may want to take your entire organization. Others will want to purchase it in a piecemeal business, buying certain valuable items and leaving others behind. They may even want to buy your business just to shut it down and eliminate the competition.
A sale in pieces may leave you the opportunity to get more than you would from the whole business by selling individual chunks off separately. However you sell, it’s not uncommon for the other business to either request you stay available as a consultant or to require you to sign a non-compete agreement.
9 Tips for Selling your Business to a Competitor
a. Ask the Right Questions: before you enter into a deal with your competitors, you should first make sure that you ask all the right questions upfront. Even if you find a lot of competitors who seem to be very eager to buy your business, you should make sure that you do well to protect your interest and that the deal is actually in your favor.
You shouldn’t approach selling your business with the intent to get rid of it as soon as possible because you could be throwing away lots of profit potential for yourself. An ideal sale should be beneficial to you and the buyer as well, especially if you’re dealing with a competitor who wants to buy your company.
Therefore, make sure you approach the negotiation by asking questions that will give you a clear idea of what to expect from the transaction if it were to take place. The questions you should ask should include;
Does the industry of your business really make it beneficial to sell to a competitor?
For instance, if you run an animal farm, then pretty much every farm nearby is going to be your competitor. But that doesn’t necessarily mean every competitor would be able to run your business. If you were to own, say, poultry, then you don’t want to sell to the owner of a dairy farm because the customer interests are different.
Another important question that you need to be clarified on is the size of your business. Is it smaller or bigger than the size of your competitors? More often than not, the competitor that wants to buy your business will have a bigger business than you because they have the money and capital to buy out other companies that are smaller.
Come to think of it, it makes very little sense to sell a large business to a small business unless your business was already in very bad shape. If you sell your business to a smaller business, you could end up not getting the kind of price you could have gotten had you looked further.
For this reason, it is best to sell to a competitor who’s proven themselves to be more successful in the industry than you. Then they can implement their strategies for success in your business after they purchase it from you.
Yet another question you should ask is if you have a good or bad relationship with the competitor. Competition among business owners is not always about bad blood. A lot of owners have mutual respect and admiration for other business owners in their industry.
No one wants to turn competition into something that’s personal. However, there are times when two competitors may not like each other because they are taking customers and profits away from each other.
So, if the time comes when one of these competitors wants to sell, and the other acts like they’re interested, the buying competitor may just be out to hurt the seller as much as they can through the deal. No two competitors can ever be true friends. You must always keep your guard up no matter what, but even more so when you know the relationship with the buyer is already sour.
b. Deposits and NDA’s are very important: the importance of non-disclosure agreements in this sort of business deal cannot be over-emphasized. It is the first thing you should do alongside getting a non-refundable deposit.
The buyer of your business will likely gain access to the business’s trade secrets and confidential information. If for any reason the deal was not finalized, then the nondisclosure will help to ensure that the buyer will not be able to use your trade secrets to grow their other competing business.
A non-refundable deposit will ensure that the buyer is serious and it will deter unserious buyers and time wasters. If your business uses a customer list, you can hold on to the customer list until after the transaction is complete in order to protect its contents.
During the due diligence phase, the seller can provide the buyer with a number of active customers (instead of the names and contact info). In general, it’s best to protect your business during this process.
c. Don’t Let Emotions Get in the Way: when you want to sell your business, your competitor can be a good friend even if you do not consider them to be that. Do not let your distrust and competition interfere with your ability to seal the deal.
d. Try to Get the Most Out of the Deal: when selling your company to a competitor, in addition to the financial terms, you should consider the following terms;
- Is it possible to get a contract to stay on with the newly merged company as an officer or consultant?
- Can you get a limited non-compete agreement when the company turns over and each party parts way (assuming you may need a job at some point if the sale of the company does not lead to early retirement)?
- Can you get an offer of employment for employees with the new company?
In addition, you should ensure that the buyer assumes the debt, accounts payable, and other business expenses that may be open at the time of the closing.
e. Due diligence is sacrosanct: Due diligence is an integral part of any contemplated business sale. Due diligence is an investigation of a business to determine the ability of the other party to deliver on what was promised and to create protective firewalls to prevent surprises, to either side, once the deal is done.
Carrying out due diligence does not come cheap, it requires a considerable expenditure of time and analysis from both parties’ legal teams, as well as financial and technical personnel.
Due diligence representation lets the seller not only meet its disclosure obligations but also determine the buyer’s willingness and ability to perform. This means not only making clear and meaningful disclosures to expedite the buyer’s due diligence but also conducting reverse due diligence on the potential purchasers and structuring the deal accordingly.
f. Make Sure You’re Ready to Sell: when you approach your competitors to sell your business, they will most probably try to haggle with you in order to get a better deal. It is very crucial that you should know the real value of your business and be ready to call out the deal if the price that your competitor is offering is below par.
In addition, you should make sure that your business is truly ready to be sold. Ensure that the financial documents and any other item that is integral to the sales process is ready. It will be too bad that you approach a competitor, they indicate interest and then you spend weeks getting documents and invoices ready.
g. It’s not an immediate process: you should know that the process of selling your business will not be an immediate one. Depending on the type of business, you likely won’t just ‘hand over the keys’ and go your separate ways. You should be ready to go through a handover period where you run the business together before you exit completely.
h. Be in charge: one of the most important things in any transaction is to take control of the process so that you are the one that is in charge, setting the pace and tone of diligence, negotiations, on-site meetings, et al.
This is particularly true when you are across the table from a competitor because there are often highly sensitive considerations such as intellectual property, trade secrets, and proprietary technologies that are usually highly guarded.
Buyers have the right to ‘take a look under the hood’ before signing a purchase agreement, but you want to make sure that it happens on your terms and under the appropriate circumstances.
i. Don’t Lose Focus on Your Business and Employees: make sure that your employees are not left high and dry from the deal. Make sure your employees are taken care of in their new roles. Negotiate as part of your deal that they will have 18 to 24 months of severance packages in case they are let go.
In conclusion, selling your business to your competitor comes with its own unique advantages and disadvantages. During the course of negotiating for your business, you should do well to protect yourself. Emphasize to the competitor that Due Diligence must be done on their end.
If the buyer insists that they want to see your financial data, customer lists, and vendor information, you should make sure they sign a non-disclosure agreement or even a purchase agreement.
By having them sign a purchase agreement, they are committing themselves to purchase your business. If they should go for this option, then you can be assured that they will definitely buy your business, or else they stand to be sued for breach of contract.
Frequently Asked Questions
1. Tips For Selling Your Business To A Competitor?
Here are some possible tips for selling your business to a competitor;
- Know your business’s value
- Try to get the most out of the deal
- Don’t let emotions get in the way
- Don’t be afraid to ask questions
- Due diligence takes precedence
- Always proceed with caution
- Always be ready to sell
Can You Force Your Business Partner To Sell?
A partner can force out another partner in most cases, but mainly for violating the partnership agreement or state or federal laws. If you didn’t violate the agreement or act illegally, you may be forced out of the partnership if a court determines that the partnership should be dissolved.
3. What Happens To Cash In The Bank When You Sell A Business?
The business owner retains any cash or cash equivalents, such as bonds or any money market funds. Cash is deemed to include any petty cash on hand and funds in the company’s bank accounts.
What Do You Do If A Competitor Approaches You To Buy Your Business?
Here are some necessary tips on what to do if a competitor approaches you to buy your business;
- Check their track record. If the competitor offering to buy your company has a track record of recent acquisitions, there is a good chance their overtures are genuine
- Look for an M and A team
- Request for an initial draft
- Place demand for a break-up fee
How Do You Approach Someone To Sell Your Business?
There are ways to approach a business owner, the following are some guidelines;
- Pay a visit. Start your inquiry with a visit to the establishment
- Conduct research
- Make some contact
- Get fully prepared
- Calculate the value
Who Do You Need To Help You When You Sell Your Business?
Business brokers can help you take care of all the big and small tasks that come with selling your company. And they’ll also evaluate your company.
Who Should Negotiate An Earn-Out When Selling Your Business?
Usually, as a seller, you will want to negotiate your earn-out based upon top-line revenue, but know that you will have to pass large discounts to the buyer first to keep everyone happy.
How Do You Sell A Struggling Business?
Here are some tips to sell a struggling business;
- Make a contingency plan
- Seek professional advice
- Keep running the business
- Get the paperwork in order
- Keep your plans confidential
- Consider hiring a broker to manage the sale
What Are The Steps For Valuing A Business For Sale?
The steps for valuing a business for sale are listed below;
- Engage in the services of a business valuation professional
- Understand the purpose of the valuation
- Determine the basis of value
- Determine the premise of value
- Gather relevant data
- Review the historic performance of the business
Can You Sell Your Half Of The Business?
Of course yes! It can be wise to sell just part of your business. It is a fairly common practice that can free up cash for you. Nonetheless, you should have a professional examine your business so they can give you advice about the best way to proceed.
Can You Sell A Business That Is Losing Money?
The short answer is yes! Many small business owners might find it hard to believe that you can sell a business that is barely profitable or even lose money. The truth is that you absolutely can. The simple secret is finding hidden value in your business.
12. What Documents Are Needed To Sell A Business?
Listed below are the legal documents required to sell a business;
- Non-disclosure Confidentiality agreement
- Personal financial statement form for buyer to complete
- Financial statements for current and past two to three years
- Statement of seller’s discretionary earnings and cash flow
- Offer-to-purchase agreement
- Note of seller financing
13. Can You Sell Your Half Of An Llc?
Yes, you can. As an LLC member, you have the power to decide to sell off your percentage of the LLC just as you would sell stock in one company to another.
14. How Do You Protect Yourself When Selling A Business?
The following guidelines are how you can protect yourself when selling a business;
- Intentionally vet all parties involved
- Only sell what the buyer is after
- Limit indemnification claims
- Get an independent valuation
- Make sure they can pay you
- Get some money upfront
- Understand your value
- Get expert help
15. What Are The Ground Rules I Should Follow When Selling Your Business?
The following are the ground rules to consider when selling your business;
- Listen first
- Talk money
- Don’t push
- Respect time
- Deliver on promises
- Set reasonable expectations
- Cultivate a good relationship
- Then follow up
16. Where Is The Best Place To Sell A Business?
Here are some of the places best to sell and buy a business both online and off;
- Ads in local media or on websites
- Other small business owners
- Through your larger network
- Business brokers
17. How Do You Calculate What Your Company Is Worth?
There are three common methods for evaluating the economic worth of a company. These categories include;
- Asset-based methods: Sum up all the investments in the company to determine the value of the business
- Earning value methods: Evaluate the company based on its ability to produce wealth in the future
- Market value methods: Estimate what the company is worth based on similar businesses that have recently been sold
18. When Should I Hire An Attorney When Selling My Business?
During the selling process. An experienced business attorney can guide you through the selling process and ensure you have obtained all necessary documentation for the sale.
19. Can You Sell A Business Without A Lawyer?
The simple answer is no! Selling a business requires thorough knowledge of business law, local law, and the steps involved in the transaction. The counsel of a knowledgeable lawyer will be required.
20. What Are The Important Deal Terms When Selling Your Business?
- A quick Sale
- An all-cash deal
- A confidential sale
- Selling 100% of the business
- A great successor for the business
- No earn-out when selling a business
21. Why Would Someone Sell A Profitable Business?
A business owner might sell up if the market conditions are right and their business performance has been above expectation. If a business has been performing poorly but in the past year or two has had amazing profits, they may sell up in the hopes that a buyer will pay a higher valuation.
22. Do You Pay Tax When You Sell Your Business?
Yes! When you sell a business, you will need to pay taxes on the gain.
23. How Do You Sell Your Small Business Privately?
Tips on how you can sell your small business privately;
- Get a professional valuation
- Organize your finances
- Find a third party business broker
- Get qualified potential buyers
- Increase your sale
- Time your exit
24. How Much Tax Would I Pay If I Sold my Business?
Generally, a 10% tax is imposed on capital gains arising from a sale, exchange, or other disposition of properties known as chargeable assets.
25. How Do You Sell A Small Business Without A Broker?
- Obtain a business valuation before starting the sale process
- Prepare your business for sale ahead of time
- Create a Confidential information memorandum (CIM)
- Make a list of potential buyers within your network
- Have your lawyer draft an NDA for interested buyers to sign
26. Why Sell To A Competitor?
The reason for selling to a competitor is because a competitor will understand your business better than outside buyers making the acquisition less risky.
27. Can You Sell A Small Business?
Selling a small business is a complex venture that involves several considerations. It can require that you enlist a broker, accountant, or an attorney as you proceed. Whether you profit will depend on the reason for the sale, the timing of the sale, the strength of the business’s operation, and its structure as well.
28. What Is The Rule Of Thumb For Valuing A Business?
The most commonly used rule of thumb is simply a percentage of the annual sales, or alternatively, the last 12 months of sales/revenues.
29. What Is The Best Way To Sell A Business?
The following tips are how you can successfully sell your business;
- Work out an exit strategy
- Sort out all accounting records
- Put your business on the market
- Respect the due diligence process
- Hire a valuation expert and find out your business’s worth
- Sift through prospective buyers: Find the perfect business owner
30. Can A Business Survive Without Profit?
The short answer is no! No business can survive for a significant amount of time without making a profit.
31. How Do You Avoid Paying Taxes When You Sell Your Business?
One of the possible ways to avoid or minimize the tax payment against profits from the sale of a business is to structure the deal as an installment sale. If at least one payment is received after the year of the sale, you automatically have an installment sale.
32. How Can You Sell Your Small Business Fast?
Here are some possible ways to quickly sell your small business;
- Get professional help— broker, lawyer, and accountant
- Prepare to put your business on the market
- Calculate the value of your business
- Time the sale for the right moment
- Perform sell-side due diligence
- Put your business on the market
- Pre-qualify the buyers
33. What Happens When Businesses Are Not Profitable?
Losses resulting from business operations have the opposite effect on profits. Companies facing a reduced market share from lower consumer demand or a downturn in the business cycle may be forced to reduce operational output. So consistent business losses may force the company into bankruptcy.
34. So How Can You Make Your Shop Stand Out?
The following are the seven possible tips to make your business stand out among competitors;
- Start a blog
- Offer a guarantee
- Come up with great and new ideas
- Provide legendary customer service
- Embrace corporate social responsibility
- Be honest about your products and service
- Admit mistakes and fix problems to build stronger relationships
35. How Do You Sell Your Small Business Products?
- Find your products
- Brand your business
- Create buyer personas
- Conduct market research
- Identify your niche market
- Build your e-commerce website
- Create high-quality product content
- Set up processes for payment, shipping, and staying in touch
36. What Should I Never Share With A Buyer Before I Receive An Offer?
Here are eight things you would never want to share with a buyer before receiving an offer;
- This is my dream house
- That couch is hideous
- I can afford to spend X
- You’ll never get that price
- I can’t wait to get rid of that
- The reason you selling it?
- What’s it really like to live here?
- I’ll give you [an extremely low-ball offer] for this house