Selling Your Business to a Competitor (Ultimate M&A Guide)

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Selling your middle-market business is an exciting time. If successful, it’s the largest earning event of most business owners’ lives. However, there are a couple of challenges. First, it’s a complicated process that can take years to do properly. At least, the prep work can take years if you want to maximize your profit. Then, there’s another problem. You need to find someone willing to buy it.

Usually, people think about selling their business to an investor, passing it down to a child, or even setting up a seller’s note to finance employees buying the business. There’s another option, though. What about selling it to the same people you’ve spent years competing against?

We know. It sounds a bit odd, but there are actually some major pros to that decision.

Today, we’re going to go over why you might want to sell your business to a competitor, how that process works, and some key things to consider.

Why Sell Your Business to a Competitor?

After you’ve spent years competing neck to neck with someone, selling your life’s work to them can feel like less of an accomplishment and more of a defeat. 

It’s okay to feel that way. 

The business world is pretty cutthroat, and you and your competitors have a problem spending quite a while going back and forth trying to one-up each other.

Not only should you not feel defeated, but there are several reasons you should be happy to sell your business to a competitor.

1: Fast Selling Time

If the competition has been fierce, and your company name is still extremely valuable, a competitor is incentivized to get you out of the way as soon as possible. After all, you’ve been digging into their potential profits for years. 

By buying you out, they can either opt to take on the profits that come from your name and established brand loyalty, or they can absorb your company and simply have another location of their own. Either way, they no longer have to compete with you.

That’s a major opportunity in the business world. Think about if Netflix had the opportunity to buy Hulu. They wouldn’t pass it up, and they’d likely jump on it as quickly as possible.

Your competitor is likely to do the same as long as it makes financial sense. If your business has hit a downward spiral, they’re less likely to worry about it. At that point, you’re probably looking to sell just to keep from crash landing, and maximizing your profit isn’t as much of a concern.

This can be a lot easier than trying to convince someone who doesn’t have a history with you that your business is of value to them.

2: Longevity of the Business

If you want your business to keep going and serving the community as well as it has for all these years, as well as provide your employees with ongoing work opportunities, a competitor might actually be your best choice for a buyer.

Just because a competitor buys your business doesn’t mean they’re going to slap their name on it, fire everybody, and turn it into a new location for their business. In fact, due to your long-standing reputation and customer loyalty, your business might actually be of more value if they leave it as-is and capitalize on those existing profit drivers while assuming ownership.

While you might not want to admit it, your competitor has been doing the same thing you have for years, and they know how to operate your business for the most part. There are minor differences, and they have to adjust, but it’s a lot easier for a long-term competitor to step into the driver’s seat of your business and keep it operating optimally than if you were to sell it to a random investor or even employees who have held management positions for a long time. 

Being in charge of the entire operation requires a very different skill set than investing money properly or even managing a single portion of the business. In a lot of ways, your competitor is your business’s best bet for long-term success after your departure.

3: It Doesn’t Have to Be the End of Your Involvement

Maybe you don’t want to stop working at your business and helping it grow, or maybe you’re not ready to retire, but you do see value in your competitor’s resources and customer base. As allies, you can boost each other’s profitability, perhaps. Well, that’s an option.

Approaching a random business or investor and asking to “join forces” is not very effective. However, your competitor can see immense value in it. Especially if you’re both on a level playing field or you have something to offer that your competitor doesn’t and vice versa.

This can be the perfect way to boost both your companies, stop being each other’s opposition, and lead both companies into a profitable new age.

It’s kind of like making your long-time rival your best friend.

Of course, this isn’t what most of our clients will be looking to do, but it is an option. Especially if you’re still young and simply looking to boost your wealth in the long term.

4: No Need to Convince Them

We touched on this earlier, but your competition knows how valuable your business is. They’ve been competing against you and have felt the consequences of your success firsthand.

Sure, you’ll still need to have all the proper documentation, prove your profitability with evidence, and follow all the same rules, but your competition is a bit more knowledgeable about your business than a random investor or buyer.

5: Higher Profits

As we said, a competitor both wants you off the market and knows what you bring to the table. As such, they’re more likely to pay a premium. They understand the non-financial value of buying your business, and many other types of buyers won’t.

When other buyers are trying to lowball your selling price to get a great deal, a competitor might actually pay more just to get you out of their hair and open up their opportunities.

Selling Your Business to a Competitor: High Profits Illustration

The Cons of Selling to a Competitor

Selling to a competitor can be a great opportunity, but it’s not always the best route. There are a few drawbacks you should consider before you pull the trigger on a sale.

1: Emotional Responses

This goes both ways. You can have an emotional response that hampers the deal, and the opposition can have an equally negative emotional response that creates deal tension.

Let’s start with you.

If you go into the deal feeling like you’re admitting defeat in your rivalry, you’re more likely to be rigid and unreasonable. That can crush the deal before it even takes off. 

It’s important to realize that your rivalry has actually been a good thing that has pushed both companies forward and benefited the communities you operate in by affecting your prices, approach to business, and overall quality. It was never really a competition in the sense that one of you had to win. Either way, it’s over now, and it’s time maturely analyze the deal terms to a successful exit.

On the other hand, the rival might take it as an opportunity. You might want to secure your employees’ jobs going forward and preserve your legacy, and the rival has free reign to do as they please once the transaction takes place. 

They might also take your attempt to sell as a sign of bad times and try to bully you in negotiations. You don’t want to turn the biggest earning event of your life into a contest to see who can outdo who and get the last laugh. So, you’ll want to stay reasonable and firm, and if the competitor takes this route, it might be better to find a different buyer. It is advised to mentally prepare to sell your business before getting into the process.

2: Potential for Harsher Negotiations

One thing about dealing with a competitor is that they know exactly how the business goes, and while your business might be a great new asset, they have a whole box of potential problems they can leverage that other buyers might not think about. They can bring up past failures that weren’t big enough to make waves, or they can otherwise leverage your smallest faults against you.

Unfortunately, while your competitor also sees your value, they also know the fine details that don’t work in your favor even if they’re nothing that should be worried about. The negotiations can get tense.

Selling Your Business to a Competitor: Tense Negotiations

3: No Guarantees

There are no guarantees that you’ll get your way post-sale no matter who you sell to. However, a competitor has a way that they like to do business, and they are probably fairly confident in that method. 

An investor or someone else is more likely to keep things how they are for your customers and staff. A competitor is a little more likely to shake things up; costing people their jobs and the community a bit of change they might not like.

How Do You Sell to a Competitor?

Now that you know the pros and cons, you can weigh whether it’s a good idea or not. However, you still might need to know HOW to sell to your competitor. Luckily, it’s the same general process as selling it to anyone else. 

You need to determine your selling strategy, gather and organize all your documentation, get help from a broker, and generally follow the same steps we’ve covered in other guides.

However, there are some key points that you need to consider, too. A competitor is a little different when it comes to negotiations, and you’ll need to be prepared for that.

Let’s take a look at the key points you should consider.

1: Be Ready to Stand Firm and Control the Sale

You need to control the sale to your best abilities, while being reasonable, regardless of who the buyer is. That’s how you maximize your profit. 

However, with a competitor, it’s even more important. The person you’re selling to is used to competing with you. It’s likely that they’ll be a lot more open to extending the rivalry into the sale and trying to come out on top. Stand firm, and keep control of the sale. As long as you’re being reasonable, it shouldn’t spiral out of control, and everyone should walk away happy.

2: Leave Emotions Out of It

We’ve mentioned emotions several times, and that’s because it’s a key point. You don’t want your emotions tangling up with any sale, but you probably have more resentment toward a competitor than you do some investor who wants to buy your business from you. 

There are a lot of problems that can stem from letting those emotions into the transaction, and honestly, if you’re truly ready to sell, those emotions shouldn’t be around, anyway. You’re exiting the business. They’re not a competitor anymore, and even when they were, everything done between the two of you was in good sportsmanship as business professionals.

3: Create an NDA (And Get it Signed)

You don’t want to let it leak that you’re selling to your competitor. If you thought your employees might be upset that you’re leaving in general and potentially putting their livelihoods at risk, imagine how they’ll feel if you tell them you’re selling to the same people they’ve been competing with.

An NDA will protect you from dealing with that and several other issues.

Selling Your Business to a Competitor: NDA

Get Help With Your Sale

Selling your business to a competitor is a difficult task in general and requires thorough preparation. You need years of documentation to be organized meticulously, you need to formulate a strategy that works, network with a variety of people, keep everything under wraps, handle the actual transition, pay the government your tax liability, and then you even have to focus on making the money you earned last for the rest of your life. It’s no easy process. 

This is why you may need help from M&A advisors.

Final Ascent is here to help businesses just like yours sell without all the stress and complications that often come with selling a business. 

Contact us today to get the help you deserve.