The decision to sell a business is never an easy one. Perhaps your company is not doing well and you want to get out of it before it collapses. Either that or you may just want to move on from the business and try something new in your life such as retirement or starting another business. The fastest way to strike a deal is to sell the business to one of your competitors. It may seem like a strange idea, but it may pay off more than you think.
Types of Competitors
There are three types of competitors that every business has: direct-, indirect-, and near competitors. Direct competitors are these that cater to the same market and customers as your business. Indirect competitors only share a little bit of the market with you, and near competitors utilize a different section of the market than you. The type of competitor you choose to sell to depends on a variety of factors. Often times, business owners will want to sell to near competitors because they aren’t typically out to hurt your business like the other two types of competitors are. Regardless, you must always take precautions when selling to any type of competitor.
If you’re selling your business because it isn’t doing well, then your competition is likely the reason behind this. So, why sell to them? The truth is that selling to a competitor is probably the easiest way for you to get a sale. After all, a competitor is in the same business that you’re in and they understand how to run a business like yours. And since your business already has loyal customers behind it, this gives your competitor the opportunity to purchase your company and bring these customers over to their side. There is no other group of buyers out there who have more to gain from purchasing your business than its competitors. On the other hand, you must be careful that you aren’t negotiating with a competitor who is just out to steal information from you to help their business.
Benefits of Selling to a Competitor
As the seller, you probably won’t want to spend the next several years trying to market and sell your business with the hopes of finding the right buyer. If you want to create a list of qualified buyers quickly, just make a list of all your competitors. They are the most qualified buyers that you’re ever going to find. Competitors are already businesspeople which means they have verifiable finances and a vast reputation in the business community. This makes conducting credit checks and reference checks a much easier thing to do on them. Also, by selling to a competitor, you are selling to someone who can run your business properly because they already have a similar undertaking of their own in the same industry that they are running too. 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.
Remember that selling a business doesn’t necessarily mean you have to sell the whole business. Sometimes a business owner may just want to sell inventory, or assets to a competitor in order to liquidate it quickly. Competitors will often jump at the chance of doing these kinds of deals because it is cheaper for them and it benefits their businesses 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.
Competitors will usually pay more money for your business than a third-party buyer if your company has the proven ability to make a profit. 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.
Related: Selling Business Assets vs Stock
Ask the Right Questions
Don’t just jump into a deal with a competitor without asking the right questions first and considering all possibilities. Even though you might find anxious competitors who are willing to purchase your business, you want to always make sure that your interests are protected and that you’re getting a good deal out of this. The purpose of your sale should not just be to get rid of your business because you could be throwing away lots of profit potential for yourself. You want the sale to be just as beneficial to you as it is to the buyer, especially if you’re dealing with a competitor who wants to buy your company. Therefore, make sure you approach the negotiation by asking questions which will give you a clear idea of what to expect from the transaction if it were to take place.
Firstly, does the industry of your business really make it beneficial to sell to a competitor? For example, if you’re in the restaurant business then pretty much every restaurant near by 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, a pizza restaurant, then you don’t want to sell to the owner of a taco bar because the customer interests are different. And even if you were to find another pizza restaurant owner to purchase your business, the pizza recipes of the competitor may not be something that your customers would like. That is why a close examination must be done of how your business would sustain itself with a new owner who’s a competitor.
Related: Restaurants for Sale
Secondly, is the size of your business bigger or smaller than the size of your competitor’s one? In most situations, the competitor’s business will probably be the bigger business because they have the money and capital to buy out other companies that are smaller. It really wouldn’t make sense for you to sell a bigger business to a company that’s smaller unless it was already in bad shape. If you do, then you’re probably not going to get the kind of price that you could if you were to just shop around a little more for a buyer. 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 of success in your business after they purchase it from you.
Finally, do you have a good or bad relationship with the competitor? A lot of owners have a 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 soar.
As beneficial as selling your business to a competitor may be, there are always risks involved as well. One of the biggest risks that you’ll discover as a seller is when buyers make information requests. This information typically pertains to specific information about the stakeholders of your business. They may want to know information pertaining to company patents, employees, or even the names of customers. This is highly sensitive information for you as a business owner to be giving out to anyone, especially when it’s a competitor. There could be a situation where a competitor is just pretending to be interested in purchasing your business for the sake of getting their hands on your company’s sensitive 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 this predicament, one thing you should always do right off the bat is to create a non-disclosure agreement (NDA) for your competitor to sign before releasing any sensitive information to them. Just make sure this non-disclosure agreement is properly worded because your competitor may try to look for any loophole they can to work around it and use your sensitive information for their benefit. Therefore, you’ll want to hire an Attorney to draw up the agreement and make sure you are protected as much as possible from the competitor stealing your information and using it for their own benefit. Of course, the seller can never be totally protected. Buyers can always find ways around non-disclosure agreements which allow 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 the time they’ll be honest if they are from a reputable company, especially one that’s bigger than yours.
There is one cold hearted risk that comes with selling your business to a competitor. Sometimes, a competitor may just want to buy your company for the purpose of shutting it down and 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 example, 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.
As you can see, there are pros and cons to selling your company to a competitor. What you want to think about more than anything is protecting yourself throughout the course of the negotiation. Emphasize to the competitor that Due Diligence must be done on their end. If they insist on seeing financial data, customer lists, and vendor information, you should not disclose this until they’ve actually signed a purchase agreement, not just a non-disclosure agreement. By having them sign a purchase agreement, they are committing themselves to purchasing your business. In other words, you won’t have to worry about them stealing your information and using it for your business or else you could sue them for breach of contract.