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When you’re ready for retirement, starting a new business, or simply exiting your industry, selling your existing business to a competitor can be a bitter pill to swallow.
While you might think that the process is the same as any old business sale, selling a business to a competitor takes a unique kind of due diligence. And if you’ve never gone about this process before, you have a few different best practices to learn.
To help you get over this particular learning curve, we asked entrepreneurs, CPAs, attorneys, and business experts to weigh in on how to sell a business to a competitor.
Here’s what they had to say.
“When selling your business to a competitor, the first thing that you should do is have an NDA (nondisclosure agreement) and obtain a nonrefundable deposit. The buyer of your business will likely gain access to the business’s trade secrets and confidential information. If the sale does not go through, 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.
By taking a deposit, you ensure that the buyer is serious and will be compensated in the event that they back out of the deal. And if your business has customer lists, it’s wise to withhold the actual customer list until after the transaction is complete. 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.”
—Matthew Odgers, Attorney, Odgers Law Group
“When exiting a business, your competitors can be your best friends even if you don’t consider them to be just yet.
Don’t let instinctual distrust and competition interfere with your ability to get a deal you want done, done.”
–Jeffrey K. Cassin, Mergers & Acquisitions Attorney, Scarinci Hollenbeck, Attorneys at Law
“When selling a business to a competitor, heed the following caution:
As soon as a competitor, or the employee of a competitor, indicates interest in a business purchase, proceed with caution. Those within the same business or industry sector may be using the premise of a business purchase primarily to learn more about the inner workings of the business. Don’t divulge information too quickly.
Realize that inquiries from those who currently own or work for a competitor may or may not be serious prospects. Separate the serious from the curious by requiring a mutual confidentiality agreement followed by an information exchange that requires buyer background information before sharing further information from your business. This exchange allows the seller to determine whether the competitor has sincere interest and capability to make the purchase. It also tests the competitor’s motivation. If they’re ‘just fishing,’ they won’t be interested in sharing confidential information.”
–Barbara Findlay Schenck, Author of Selling Your Business For Dummies
“When selling a business to a competitor, some of the items to consider outside the obvious financial terms are the following:
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 an early retirement)?
Or maybe you’d want an offer of employment for employees with the new company. And finally, make sure the buyer assumes debt, accounts payable, and other business expenses that may be open at the time of the closing.”
–Michael Lerner, Owner of Promos On-Time, Inc.
“Due diligence is the first phase of any contemplated business sale. It is the formal process by which each party examines 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. Not surprisingly, it requires a considerable expenditure of time and analysis on the part of 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 a reverse due diligence on the potential purchasers and structuring the deal accordingly.”
–Charles Vethan, CEO of Vethan Law Firm
“I’ve had the privilege of running a sale of another company I have built twice before—the first attempt we failed. The second, a few years later, we successfully exited. Both times we shared information with competitors, which is not a great feeling.
My advice is this: Work with a good M&A advisor. They’ll have seen this before and can guide the business owner.
Also, remember that big companies (usually) don’t cheat—there are too many people involved. People get fired for breaking rules, and large companies cannot afford the reputational risk of behaving badly. And usually, they’ll destroy your information if a sale does not go through so as to protect you. Hopefully they will not compete against you in the future with your secrets.
On the other hand, smaller companies do not have those same existential risks if they cheat. It’s really down to the morality of the person you are dealing with. Will they copy, remember, and use the privileged information you have provided to them if the sale does not go through? If you have any doubt, then they are not the person to sell to. Try to deal, if at all possible, with honorable people.”
–Jonathan Breeze, CEO of AardvarkCompare.com
“Working for a business-for-sale marketplace, here’s my best advice for selling your business to a competitor:
If you approach your competitor, rather than them going to you, they’ll know you’re looking to sell and will try to knock your price down even more. It’s important to know your business’s value, and potentially even be ready to walk away from a sale if the price isn’t right.
Also, make sure your business is ready for a sale. You’ll need to prepare financial documents and anything else they may want to see. The last thing you want is to approach a competitor and then, if they’re interested, spend weeks getting documents and invoices collated.
And finally, know that it’s not immediate. Depending on the type of business, you likely won’t just ‘hand over the keys’ and go your separate ways. Be ready to go through a handover period where you run the business together before you exit completely.”
“Evaluate the true interest of the competitor in your business. Is this likely a ‘fishing expedition’ to ferret out your weaknesses or a real interest based on a strategic need? Ask a lot of questions about why the competitor is interested and what he or she hopes to do with your business. If it doesn’t make sense to you (knowing your business), be wary.
Ask what criteria the competitor will use to determine whether or not to go forward. Then, take those criteria and determine as objectively as you can whether your business meets those hurdles. If not, don’t bother negotiating.”
—Philip P. Crowley, Esq., Law Office of Philip P. Crowley LLC
“Any business owner selling their business should get most or all of the proceeds in cash as opposed to stock in the buyer. The reason being that stock in the buyer has a much less certain future value.
Also, those selling their businesses should get as much of the cash now rather than accepting payments over time. Agreeing to accept payments in the future exposes the seller to several forms of counter-party risk. This counter-party risk has two components: default risk, where the buyer simply chooses not to perform as agreed in the buyout agreement, and credit risk or bankruptcy risk, where the buyer is unable to perform due to insolvency or bankruptcy.”
–Brian J. Thompson, CPA and Attorney
“The most important thing in any transaction is to take control of the process so that you are the one ‘driving the bus’ and setting the pace and tone of diligence, negotiations, on-site meetings, etc. 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. That leads us to the second point:
Invest in the appropriate resources to make the circumstances as favorable as possible. Most people will agree that attorneys are expensive. However, a rock-solid nondisclosure agreement could potentially save your business if a transaction dies during negotiations. Also, an attorney or CPA can assist you with setting up a ‘clean room’ that can either be online or a physical location where potential buyers can view sensitive materials. Great entrepreneurs and business owners have lean practices ingrained, but a business transaction is not the time to be fee sensitive.”
—Matthew Hinson, CPA at Live Oak Advisors
“Don’t abandon your strategy during the negotiation phase because you want to take advantage of potential synergies. The deal may not close and you are now behind the competitive 8-ball.
Also, make sure your employees are taken care of in their new role. Negotiate as part of your deal that they will have 18 to 24 month severance packages in case they are let go.”
—Dr. Patrick Michael Plummer, Professor at Penn State University
“If you are serious about selling, have your business appraised. When you make the first move to sell your business, you should be prepared to offer a selling price. An appraisal will help you set that price based on market facts, rather than gut feeling.”
—Michael S. Blake, President of Arpeggio Advisors
There you have it—12 experts’ advice on how to make an unpleasant experience a little bit easier.
Have you sold your business to a competitor? Tell us what it was like in the comments!