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How to Sell Your Business to a Competitor

By Quiet Light
| Reading Time: 10 minutes

Whether you want to move on to new business opportunities or you’re ready to retire and get some quality relaxation, deciding to sell your business is a big decision. And while the best offer might come from an opportunity to sell your business to a competitor, selling to someone who has been vying for your customer base can be difficult to navigate. 

There are many elements to take into consideration when selling your business to a competitor. Not only do you need to make sure you’re getting a favorable purchase price and deal terms, but you also have to make a plan for disclosing strategic information to a competitor and ensure proper due diligence.

In this article, we’ll discuss everything you need to know about landing a successful exit, including:

  • How to weigh the pros and cons of selling your business to a competitor
  • Understanding the legal ramifications of selling your business to a competitor
  • Navigating an acquisition offer from a competitor 
  • How to announce the sale to your employees or customers (if applicable)

Pros of selling your business to a competitor 

There are many benefits to selling your business to a competitor. Some of the main advantages include:

  • Your competitor knows the landscape of your business 
  • A knowledgeable buyer makes for a shorter training and transition period 
  • Competitors often have quicker access to financing because of established business relationships 

Competitors know and understand your business 

Unlike a less experienced buyer, your competitor is a strategic buyer who has extensive experience with businesses in your field. They can also bring a fresh perspective to your business and transition into running the business with minimal adjustment to their day-to-day business operations. 

Quicker training and transitions 

Selling your business may require you to be available to assist the new owner with training and transition. The length of time for training depends on your specific business deal. However, it can often be shorter for a business owner who is familiar with the market.

Buyer access to financing 

Your competitor has spent time building their current business (or businesses). This means they have more than likely already established banking relationships for financing.

Cons of selling your business to a competitor 

There are numerous benefits to selling your business to a competitor. However, there are some common objections some sellers have to that option. Some of these include:

  • Competitors can take advantage of getting a look at the details of your business
  • A buyer might not have the same vision for the legacy of your company that you have
  • Competitors might not intend to retain employees or customers 

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Competitors can take advantage of disclosed information 

During the selling process, buyers review and verify sensitive and financial information relating to your business. It’s possible that your competitor has no intention of closing the deal with you and is simply using the opportunity as a chance to “look under the hood” of your business for information they can use to grow their own business—and harm yours in the process. 

Mismatched vision for the company

Some competitive business owners have a respectful and collaborative vision for acquiring your business and are interested in continuing established relationships with suppliers and the community surrounding your business.

However, this isn’t always the case. Your competitor could have other intentions. They might just be looking to acquire your business without maintaining the legacy of the business you’ve worked hard to build. 

Lack of desire to retain employees or customers 

The intention of your competitor matters when it comes to selling your company. If the main reason they’re interested in purchasing your business is to eliminate direct competitors, they might not have plans to retain your employees or invest in customer service during or after the transition. 

Whether you’re a small business owner or you’re running a large company, working with an Advisor can help protect you from all of the negatives of selling your business to a competitor.

Business Advisors also have the experience of facilitating different mergers, and that acquired knowledge is valuable to you as a business owner looking to sell.

Regardless of your reasons to sell, a business Advisor will walk you through all of the steps to successfully complete the sale of your business. Some of the benefits they provide include:

  • Assisting you to put together a pricing strategy that honors the hard work you’ve put into building your business 
  • Ensuring due diligence is followed
  • Evaluating acquisition offers and answering questions you might have along the way
  • Helping you with the negotiations process

Selling your business to a competitor requires extra levels of awareness and due diligence.

Here are some steps you can take to protect your business if you’re considering selling to a competitor:

  • Know the value of your business. 
  • Ask competitors to sign a nondisclosure agreement (NDA).
  • Make sure any potential buyers are qualified to purchase your business.
  • Release information in different phases as you build trust with a potential buyer.
  • Be knowledgeable about what information you’re required to share (and what you aren’t!).

Know what your business is worth

When you’re getting ready to sell your business to a competitor, it’s important to know what your business is worth. Your business can be valued using the SDE Multiple Method

SDE stands for seller’s discretionary earnings. It’s the pre-interest and pretax profits that your business generates before you account for non-cash expenses, one-time investments, your benefits as the owner, and unrelated expenses or income. This is the number that reflects how much money your business makes for you as the owner. 

After you have your SDE, you multiply that number by the multiple. For example, if your business generates $300,000 in SDE and is valued at a 3x multiple, it is worth $900,000 ($300,000 x 3 = $900,000).

Wondering where that multiple number comes from? 

At Quiet Light, we use four elements to determine the multiple, which we call the Four Pillars of Value. These pillars include:

  • Growth
  • Risk
  • Transferability
  • Documentation

When we work with you during the valuation, a business Advisor looks at every aspect of your business. This allows us to determine where it stands in relation to our Four Pillars.

Don’t move forward without an NDA

During the process of buying your business, a competitor will learn about your trade secrets, intellectual property, and other confidential business information.

If the sale doesn’t end up going through, having an NDA helps to ensure the buyer won’t use the information they’ve learned about your business to grow their own business—and if they don’t honor that agreement, you’ll be able to take legal action against them. 

Qualify your buyers 

Once you have a potential buyer who is interested in purchasing your business, don’t be afraid to ask questions to get to know them and what is motivating their desire to purchase.

Have they acquired multiple competitors in recent years? This could be a sign that they’re experienced in purchasing a competitor and are serious about purchasing your business. If this is the first time they’ve acquired a competitor, it’s good to watch out for red flags. Beware of buyers who try to get a closer look at your business details without following through. This is something a qualified Advisor can be tremendously helpful with.

You can always turn to your attorney for legal advice during the selling process. Your lawyer is also able to search through public records to see how many times your potential buyer has been involved in any litigations in the past. 

Don’t release all the information about your business at once

When you’re in the beginning stages of selling your business with a potential buyer, don’t release sensitive information. It’s good to keep things general. You don’t want to release any information they could use in competition against you. 

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Working with a business Advisor to sell your company allows the Advisor to assure that due diligence is performed. The Advisor would pass along the necessary information to close the deal, but they wouldn’t share any confidential information. 

Get familiar with what you have to share and what you don’t have to share

There is some information about your business that you can expect any purchaser would want to know. Some of these items include things like:

  • Financial and tax information
  • Bank statements
  • Income tax returns
  • Balance sheets
  • A copy of your lease if you rent space for your business
  • Inventory lists
  • Copies of equipment leases
  • Payroll and sales tax information

Some buyers might want to know more about specific contracts you have, which you can provide with redacted names. Others might want to learn more about your employees and the types of agreements you have with them.

Then, there are documents that a potential buyer might request during the sale of a business that you are not required to disclose, including:

  • Customer names and contact information
  • Trade secrets
  • Software code 

When it comes to discussing your customers’ information, you can share the number of customers you have without sharing identifying information. Even when you’re in the due diligence stage of selling your business, it’s still important to protect your business from competition. 

How to handle an acquisition offer from a competitor

Once your business is listed for sale, there are two types of buyers who might be interested:

  • Financial buyers
  • Strategic buyers

Financial buyers, such as private equity firms, are interested in generating cash flow. Strategic buyers, such as your competitors, are interested in seeing if acquiring your business fits into their long-term goals in your industry.

When an acquisition offer comes in from your competitor, there are several steps you need to take, as well as a few red flags to keep an eye out for: 

  • Review any offers with a business Advisor 
  • See if the potential buyer has a mergers and acquisitions team working on the deal
  • Ask for a break-up fee 

Review the offer with your business Advisor

Even if your competitor only casually expressed interest in the sale of your business instead of giving you an official offer, reach out to your business Advisor right away. Their experience will help you sort through the details of any acquisition offers and make sure you aren’t missing any red flags. 

Do they have a mergers and acquisitions team?

If a large company is serious about purchasing your business (whether it’s an online business or a more traditional brick-and-mortar model), they’ll have people dedicated to sorting through the legal and financial details. If a larger company doesn’t have a mergers and acquisitions team (or at least one employee dedicating serious time to the offer!), this could be a red flag that they’re really not serious strategic buyers.

However, this is a nuanced topic because smaller buyers often don’t have professional representation. If you have questions about your competitor’s purchasing process, you can always as your business advisor or legal counselor to clarify

Ask for a break-up fee 

A break-up fee is an amount of money that your competitor would have to pay to you if they don’t go through with the purchase of your business.

Usually, break-up fees are involved for big company acquisitions, but if you’re thinking about selling your business to a competitor, it’s possible that your business could take the hit if they don’t follow through.

Including this fee is also another way to weed out any competitors who just want to get more information on your business without ever being serious about purchasing your company. 

Public communications when selling your business to a competitor

You closed the deal—all the hard work you’ve put into starting, building, and selling your business to a competitor has paid off! But before you throw a party and pack up the office, it’s important to pay attention to how you communicate this new business deal in a way that honors relationships and to be mindful of how others will be affected by this announcement. 

When you’re ready to announce the sale of your business to a competitor, there are two groups of people to share the news with:

  • Your employees
  • Your customers and the public

Sharing the news with your employees

Timing the announcement of the sale of your business to a competitor to the people who work for you is a delicate balance. If you share the news too soon, you won’t have details when your employees ask about what the future holds for them after the acquisition. But if you share too late, employees might find out from other sources besides you that the deal is going through. 

There are a few things to keep in mind when sharing news of the change to employees that can make the process go smoothly:

  • If necessary, share the news with a few key staff members who are involved with the daily operations of your business. 
  • Share the news with your staff at the beginning of the week, so they’re able to reach out with any questions without having to wait (and worry!) over a weekend.
  • Affirm the good and hard work your employees have done that has helped grow the company and make this sale possible.
  • Be clear about your reasons for selling to nip any rumors or gossip in the bud.
  • Clarify what this change will mean for your employees’ daily lives.

Making the decision on when and how to share this news with your employees is a personal choice that will be impacted by your personality, who your employees are, and the work culture of your business.

Ultimately, how you decide to share this information is up to you because you know your people best. 

Making the official public announcement 

Communicating the change in ownership to your account holders and customers not only helps build credence in the new owner, but it also helps build your reputation as a successful, reliable business owner.

By sharing information strategically with your customers, especially those who are stakeholders in your business, you can help everyone involved navigate this change with confidence.

Here are a few things to keep in mind when you’re communicating the sale of your business to your customers:

  • Time the announcement of the sale of your company so that key account holders and customers learn about the news from you rather than from another source.
  • Keep the marketing of the sale upbeat and personal. Let your customers know what this change means for them and share information about the new business owner and why he or she is qualified.
  • Continue to instill confidence through your customer service experience. When answering customer feedback, communicate the strategy for the upcoming change with clarity. 

If you have any questions on your marketing communications (or any other questions about selling your business to a competitor!), you can always ask your Advisor or business lawyer who has experience with successful business sale announcements.

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