The decision to sell your business can be tough, whether you’re selling because of internal difficulties with the business or because something new is calling your name. One of the fastest ways to sell your business is by striking a deal with a competitor. This might seem odd, but this strategy can quickly pay off.
Types of Competitors
Three types of competitors should be considered potential buyers:
- Direct competitors: those that cater to the same buyers and market you do.
- Indirect competitors: those that share a small segment of the market with you.
- Near competitors: those that cater to a different, but similar, market segment.
No matter which type of competitor you sell to, you’ll need to take steps to avoid hurting your business. Nevertheless, selling to a competitor is often the fastest way to get a sale. After all, a competitor already knows the market, and has an incentive to increase its market share. Just make sure you don’t enter negotiations with a competitor whose only interest is stealing business secrets.
Why Sell to a Competitor?
There are several advantages to selling to a competitor:
- They’re already businesspeople, which means they have a good reputation and sound finances.
- They will know how to smoothly run your business, since they’ve already done it.
- They may be willing to pay more for your business, particularly if you have already proven your ability to turn a profit.
- They often have cash on hand, which means that seller financing may not be a concern.
Simply put, competitors are often more qualified than other buyers. So you don’t have to worry that you’re leaving your business in the hands of someone who is not competent to run it.
Remember that selling doesn’t necessarily mean selling the whole business. It’s possible to sell just your inventory, or a small share of the company. These can be appealing options to competitors who want to absorb a portion of your business.
Risks of Selling to a Competitor
The most obvious risk of selling to a competitor is that they will use the transaction to gain access to trade secrets. A buyer who makes information requests and backs out of a deal can wreck your business. So carefully protect your company with well-crafted NDAS.
Sometimes a buyer only wants to purchase the business to shut it down and remove the competition. If you have an emotional connection to the business, this can be devastating. So ask about the purpose of the sale in advance, and consult an attorney about what you can do to protect the business you have built.
Ask the Right Questions
Don’t jump into a deal with a competitor without asking the right questions. Those include:
- Is it really to your benefit to sell to a competitor? In some industries, everyone is a competitor, but not every competitor is a suitable buyer.
- Is your business smaller or larger than the competitor’s business? It rarely makes sense to sell a big business to a smaller one?
- Do you have a good relationship with the prospective buyer? Mutual respect and admiration can take you a long way. Mutual animosity will not.
There are pros and cons to selling to a competitor, but one thing remains consistent: you must take steps to protect yourself throughout negotiations. The competitor must do their due diligence, but you should not disclose this information until an NDA is in place—and possibly a purchase agreement. A transactional advisor and the right team can help you craft a strategy to protect yourself.