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What does it mean to sell your business to a competitor?

If you’ve made a strategic decision to sell the business you’ve built, then you may be realizing that the best offers are being made by your biggest competitors. This happens because other business owners that are working in the same industry are wishing to gain a larger percentage of that industry’s global market. Competitors come in different shapes and sizes, but if you are researching the process of selling your business you may recognize the following players:

Near competitors

Competitors that are doing business in the same industry as your business but market their products or services to a different market share. Sometimes called phantom competitors or replacement competitors, an example of a near competitor may be a coffee shop down the road from your breakfast restaurant. Typically, small business owners prefer to work with near competitors when they are selling their business because they are more likely to continue the business model they worked so hard to build.

Direct competitors

Direct competitors are businesses that target the same type of customers as your business does and are often the responsible party when customers are “lost to the competition.” The business plans and financial profiles of direct competitors will closely resemble your own business. An example of direct competition may be a specialty clothing shop in the same neighborhood as your apparel store.

Indirect competitors

Indirect competitors share a portion of the same market as your business. The business model and marketing strategies of an indirect competitor are structured to meet the same customer needs as your business, but do so in a different manner. An example of an indirect competitor may be a bicycle shop and a CrossFit gym. Both are offering fitness solutions, but devotees are likely to prefer one type of exercise to the other.

The process of selling a business to any type of competitor may not look the same for every entrepreneur. The concepts, steps, and tips in this article are relevant whether you are selling your entire business or just parts of it.

The pros and cons of selling your small business to a competitor

The reasons that drive the sale of a business differ for every entrepreneur. Some individuals sell their businesses when their interests change, when their family situation evolves, or when it’s time to retire. Other folks sell their business with the intention to make a profit and move on to the next phase of their career plan. Whatever the reason, making the decision to sell your business to a competitor has advantages and disadvantages.

Pros of selling to a competitor

The advantages of selling a business to a competitor instead of a third party or startup organization include:

  • Qualified buyers – The process of marketing an existing business to qualified buyers can be challenging and in some cases takes many years. However, competitors are already operating businesses, have verifiable finances, and understand the requirements to purchase a similar business.
  • Reputable buyers – A good business owner wants to know that their customers will be taken care of even if ownership changes hands. Selling a business to a direct, indirect, or near competitor is a good way to ensure that you are leaving your business in good hands.
  • Industry knowledge – Selling a business to an entrepreneur means a greater chance of success for the business you worked hard to build. Competitors are also familiar with market trends and industry vendors, so providing credit and character references are easier for them.

Cons of selling to a competitor

Just like any business transaction, there are also disadvantages to considering prospective buyers in the same industry. One con of working with potential buyers that are also competitors is the requirement to fulfill information requests during the due diligence process. Information requested in preparation for a sale may include personal information about the owners and stakeholders, financial reports, customer lists, and documents referring to any patents or other intellectual property.

The greatest risk for business owners when releasing this type of sensitive information is what happens to the information if the business deal does not go through. Competitors that acted as strategic buyers may use customer details, vendor contacts, and financial details about stakeholders to grow their own business if they do not purchase your entity. Another disadvantage of selling your business to the competition is that you can’t guarantee the outcome. It is not uncommon, especially when working with direct competitors, for the new owner to purchase the business with an exit strategy in mind and close the business shortly after the transaction is final.

How to protect your business while preparing to sell

While there is always risk involved with business transactions, there are actions you can take to protect yourself, your confidential information, and your business from the consequences of a failed business sale. A non-disclosure agreement (NDA) can be used to protect sensitive information. An NDA can be written by an attorney or you can use a template. The NDA will be signed by all parties and require the interested buyer to not share any of your business details or use them for their personal or business gain.

Necessary steps to sell your business to a competitor

Finding a new owner for your business may seem like an overwhelming task, but the process is manageable when you take the proper steps to find the right buyer and complete the transaction. The steps listed below are a general guide to the sale process, but each sale will vary depending on the unique circumstances of the seller and buyer.

List potential buyers

The first step to a successful business sale is to identify competitors. The direct, indirect, and near competitors described in the first section of this article will most likely make up the pool of qualified buyers you are going to market your business to, so getting to know who and what they are will help expedite the transaction.

Determine the value of your business

Before beginning the sales process, you’ll need an accurate business valuation. It is imperative to know your company’s worth before opening yourself up to offers and quoting estimated selling prices. In order to calculate the exact value of your business, it is a good idea to work with a business broker and a certified public accountant (CPA). The broker or the CPA will require any financial details that they do not already have on file which may include:

  • income tax returns
  • accounts payable reports
  • cost segregation reports
  • real estate appraisals
  • revenue reports
  • cash flow statements
  • balance sheets
  • private equity statements
  • fixed asset and inventory ledgers

Protect your business

Although meeting all requests for information is an important part of the due diligence period once a qualified buyer is identified, it’s important that you continue to take action to protect your business until the sale is final. Consult with legal counsel and require that potential buyers sign an NDA or other confidentiality agreement. Refrain from providing sensitive information about customers, employees, or vendors until a formal purchase agreement is executed.

Finalize the sale

Whether you are selling all or part of your business, nothing is final until the sale is legally documented. Working with the right professionals, like a business broker and an attorney is the key to finalizing the sale and having a successful closing.  Once the purchase agreement is signed and the due diligence requirements are met, the attorneys representing each party will organize the closing date and prepare the settlement statements. 

Tips to successfully sell your business

Selling your small business to a competitor doesn’t have to be a painful process. We’ve highlighted some of the best tips in the business to successfully sell your business to the competition.

Keep it professional

Emotions can run high during any stressful business transaction, like mergers, acquisitions, and sales. Even though the shop on the corner has been a business rival for years, when you are looking for a potential buyer, they may quickly become your best bet. Leave emotions out of it. Do not deny a purchase agreement or offer for personal reasons, but strive to maintain a high level of professionalism throughout the transaction.

Consult an expert

We cannot stress enough the importance of utilizing the knowledge of experts like business brokers, CPAs, attorneys, and M&A advisors. An M&A, or merger and acquisition, advisor can provide valuable advice about valuing your business, choosing the right buyer, and the required confidentiality requirements. If you don’t have anyone in mind, the CPA that does your taxes or the attorney that helped you organize your company may be a great place to get a referral.

Get your needs met

There are many terms to a sales agreement to negotiate when selling your business to a competitor. You may want to ask the new owner to guarantee the continued employment of your staff or to extend the current contracted prices to your valued customer base. It may be beneficial to offer consultation services to the new owner, which can provide you with supplemental income while you organize your next steps.

Don’t rush the preparation

Entering a business deal unprepared will not only cost you long hours, but it may cost you your mental health as well. As soon as you start to consider an exit strategy, start preparing documents. Organize your financial documents, consider your selling price, and make some appointments to meet with business sale professionals. Don’t be afraid to ask for more time during the preliminary purchase inquiries. It is also realistic to plan to be available for follow-up questions and wrap-up tasks for up to 90 days following a sale.

Final thoughts

Selling your business to a competitor can be a profitable and rewarding process if it is handled correctly. Working with indirect, direct, or near competitors will benefit the seller because the new owner will be financially capable and will already know how to succeed in the industry. The steps necessary to complete a sale will include identifying competitors, receiving an accurate business valuation, creating an NDA or other confidentiality agreement, and finalizing the sale with the help of a broker or attorney.

Whether the sale of your business is a stepping stone to retirement or part of a longer growth strategy, like it was for this Long Island car service company, selling a business to a competitor can provide long-term benefits to both the seller and the buyer.

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