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What Are the Pros and Cons of Selling a Business to A Competitor?

When considering potential buyers for your business, the idea of selling to a competitor might have crossed your mind. Although, selling your business to a competitor, much like any strategic decision, comes with its own set of advantages and disadvantages. It’s essential to carefully assess the pros and cons to determine whether this is the right move for your business.

Understand your Competitors

Before diving into the benefits and drawbacks, it’s important to know that not all competitors are the same. There are three different kinds of competitors: direct competitors; indirect competitors; and near competitors. 

The direct competitor is one who competes with you, nose to nose, on product, service, and price. 

The indirect competitor will compete with you on some products or services. You don’t often come across the indirect competitor competing with you on your full line of products and services. 

The near competitor is one who could be a direct competitor but in a different territory and seldom would you run across one another in a competitive environment.

It’s also important to identify their motives. Competitors will buy a competing business for many reasons such as: 

  • To increase market share 
  • To gain access to more and/or better equipment 
  • For larger or more modern facilities 
  • To acquire better sources of supply 
  • Acquiring highly skilled and competent employees 
  • For a better return on investment (ROI)

Also keep in mind that not all competitors are buyers. Many are simply looking for information. A competitor’s interest in a business may be a sophisticated method to acquire a competitor’s knowledge; thereby gaining a competitive advantage over the competitor who is thinking of selling their business.

The Pros of Selling to a Competitor

Better Valuation

Selling to a competitor could lead to a higher sale price as a competitor understands the market and may be willing to pay more for a strategic advantage

For example, let’s say you own a local bakery with a strong customer base. A competitor who operates bakeries across your city might see the opportunity to expand their reach by acquiring your business. They understand they can improve their distribution network and reach more customers by integrating your bakery into their existing operations. This strategic advantage could lead to a higher sale price.

Quick Sale with Streamlined Due Diligence

Selling your business to a competitor can expedite the sales process. Since the competitor is already familiar with the industry and market dynamics, the due diligence phase can often be streamlined. This efficiency not only hastens the sale but allows you to move onto your next venture or life chapter more swiftly.

Easier Transition

A competitor’s existing knowledge of your industry and business operations can facilitate a smoother transition. Their familiarity with the industry’s nuances and your business’s unique challenges can lead to a more efficient integration process. This, in turn, can minimize disruption for your employees and customers during the ownership transfer.

Save Time and Resources on Marketing to Potential Buyers

Another compelling advantage of selling your business to a competitor is the substantial savings in both time and money on marketing efforts. Marketing a business for sale demands a considerable investment in various resources, from crafting persuasive advertisements to engaging potential buyers through multiple channels. However, when you consider a competitor as the buyer, a significant portion of these marketing endeavors can be overlooked.

Makes Negotiations Faster

Negotiating a business sale can sometimes become a protracted process, involving multiple rounds of discussions, due diligence checks, and legal intricacies. However, the decision to sell your business to a competitor can significantly expedite the negotiation timeline. This acceleration is rooted in the competitor’s inherent knowledge of the industry and your business’s position within it. 

The Cons of Selling to a Competitor

Increased Competition

One of the most apparent downsides of selling to a competitor is that you’re essentially strengthening a rival. By transferring your business to them, you’re empowering them with the resources, assets, and market share you’ve built over time. This might lead to heightened competition in your industry, potentially making it more challenging for your future endeavors.

Loss of Control

Selling your business means losing control over its day-to-day operations and strategic decisions. For many business owners, this shift can be emotionally challenging, especially if you’ve been at the helm for a long time. You’ll need to adjust to a new role or possibly step away entirely, depending on the terms of the sale.

Let’s say you’re the founder of a technology startup known for its innovative products. Selling to a competitor means you no longer have the final say in product development, marketing strategies, and company policies. This change might require a significant adjustment in how you approach your professional life.

The new owner’s decisions might not align with your vision, leading to potential shifts in the brand’s identity. This could impact customer loyalty and weaken the reputation you’ve built. There’s also a risk that the new owner might choose to discontinue or modify your business, diluting its essence and eroding its uniqueness.

Potential Loss of Employees and Customers

When a competitor acquires your business, some of your employees and customers might feel uneasy about the transition. Employees could be concerned about changes in work culture or job security, while customers might be hesitant to continue doing business with a competitor. This could lead to talent drain and customer attrition. Additionally, suppliers might reassess their terms and conditions with the new owner, potentially affecting your existing arrangements.

Potential for Industry Consolidation

Selling your business to a competitor can contribute to industry consolidation, which might have long-term effects on pricing, competition, and market dynamics. With fewer players in the market, the remaining businesses might have more control over pricing strategies, potentially impacting your customers and revenue.

Restrictive Non-Compete Agreements

Selling your business to a competitor might come with the requirement to sign a non-compete agreement. This agreement could limit your ability to initiate or become part of a similar business within the same industry or geographical region for a specific duration. This restriction can hinder your entrepreneurial aspirations and limit your potential for future endeavors in areas where you hold expertise.

Good Practices for Selling Your Business to a Competitor

Keep in mind that not all competitors are buyers. Many are simply looking for information. A competitor’s interest in a business may be a sophisticated method to acquire a competitor’s knowledge; thereby gaining a competitive advantage over the competitor who is thinking of selling their business. 

Protect your Assets

If you are thinking of selling your business and are approached by a competitor claiming to be interested in buying your business, consider the following procedures: 

Say nothing until a comprehensive confidentiality agreement prepared by a competent intermediary or an experienced transaction lawyer, is executed by the inquirer containing non-interference provisions to protect your employees, customers, suppliers and proprietary processes and procedures. 

Do not provide customer lists, employee names, supplier lists, or detailed financial information until a purchase agreement is in place, and you are comfortable that the buyer is sincere in completing the transaction. Then, and only then, do you allow the buyer to initiate the due diligence process, which then needs to be kept on a short leash and under firm control.

Get a Fair Valuation

It’s a good idea to find out how much your business is truly worth. This helps both you and your competitor understand its value in the market. Getting an accurate valuation prevents your competitor from offering too little for your business. It also sets a solid starting point for negotiations. With a clear valuation, you have a foundation to base your discussions on, avoiding vague estimates that could lead to an unfair deal.

Looking for tips on how to evaluate your business? Read our blog: How do I determine the value of my business before selling it?

Ask Questions and Verify

Inquire as to why this competitor is interested in your business? What is their long-range business plan? How does your business fit into those plans? What about their management team? What financing do they have available? Will they provide you or your professional team an opportunity to confirm their financial capacity? Will they provide you with information about their business, including a tour? 

It’s essential to ask these questions and gather information about your competitor’s intentions. This will help you understand if they are genuinely interested in maintaining your business’s legacy. This information will give you a clearer picture of how your business will be handled after the sale.

Read our blog on common mistakes business owners make when selling their businesses for more tips. 

Partner with Robbinex

It takes years of experience in the merger and acquisition field to negotiate with competitors and create a transaction that is fair and equitable to the seller. 

Robbinex has accumulated knowledge based on almost five decades of experience and approximately 450 closed transactions. Factors we believe are successful to the sale of a business include:

  • Fully understanding the goals of our clients.
  • Proper preparation of a business for sale.
  • Comprehensive preparation of the information required by investors.
  • Effective execution of a transaction, supported by the proven Robbinex Three-Phase Process™ for selling a business.

Author: Robbinex

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