Selling Your Business to a Competitor? Take Charge of the Process
Is a competitor the most attractive buyer for your business?
In many cases, the answer is yes.
Competitors often look for add-ons to complement their current business. They understand your business and can easily take over operations after a sale. A competitor sees the value of your business, and how your firm can enhance the value of their enterprise.
However, selling a business to a competitor can be risky, particularly if the transaction falls through after company information is shared.
If you’re considering a business sale, competitors will be interested- for a number of reasons.
Why Competitors Become Buyers
Generally speaking, business purchasers are looking for companies with a track record of sales, positive cash flow, and net profits. Buyers want firms that offer competitive differentiation and uniqueness in the market. Companies with recurring revenue streams are particularly attractive.
Competitors know your business well, because they have experience in the same industry. As a result, they understand the value of your business, and the potential for growth after purchasing your company.
If you’re interested in selling specific assets, such as inventory or equipment, a competitor can easily put your assets to use.
A competitor can use industry experience to market your business effectively. They understand the marketing messages that are effective, and how to move people through the sales process.
Finally, if you sell a business to a competitor, the transition to the new owner is often easier than selling to someone outside of your industry. Competitors understand how your business operates, and there is less of a learning curve for the new owner. A competitor may have the business track record and financing to grow your business after the sale.
Selling to a competitor, however, can be risky.
How to Manage the Risks
If you decide to negotiate a potential sale with a competitor, you need a team of advisors to protect your interests.
Think about the factors that make your business successful. You have a product or service that solves a problem for your customers. Your business has a talented staff that manages the operation and makes smart decisions. You have an established client base that generates repeat business.
You have a recipe for success, and that information is valuable to a competitor. How can you start a sale negotiation and protect the business you’ve created?
Your most important team member is a business broker. Raincatcher is an experienced firm that can serve as your business broker throughout the entire sales process. A broker will help you find and evaluate potential buyers, manage the due diligence process, and negotiate the sale price for your business.
A business broker can also help you manage the emotions that can arise with a business sale. The thought of selling your business to a competitor may cause feelings of bitterness. If a competitor can offer an attractive price and reasonable terms, don’t let emotions prevent you from closing a successful sale.
There’s a risk that a competitor is only using a sale negotiation to learn more about how your business works. In some cases, the competitor is not a serious buyer. To protect your interests, a broker can control the information you disclose during a negotiation.
Insist that the potential buyer sign a Non-Disclosure Agreement (NDA) before any information is exchanged.
If the competitor is serious about negotiating a purchase, their firm should be willing to sign an NDA. Competitors who simply want your confidential information may hesitate when you ask for an NDA, and you can move on to other potential buyers.
The NDA will state that the potential buyer cannot solicit business from your clients, and cannot contact your firm’s employees, vendors, and professional advisors. This requirement should be in place during the negotiation, and after the process ends. What the competitor learns must remain confidential.
An NDA should be signed before you disclose critical information, such as your customers, vendors, and your detailed financial statements.
You might also require that potential buyers pay a non-refundable deposit, so that you are compensated if the negotiations end without a sale. This is another strategy to ensure that buyers are serious about a purchase.
An attorney is a second key member of your negotiation team.
Retain an attorney to create and negotiate the NDA. Hiring an attorney is expensive, but it’s the best strategy to fully protect the business you’ve created.
Once the competitor signs an NDA, your business broker and attorney can manage the due diligence process for the sale.
To prepare for due diligence, you’ll need several years of financial statements, and access to a number of documents, including customer and vendor agreements and your marketing plans. Your team should also include the CPA who prepares your tax return, and may participate in creating your financial statements.
Your attorney can set up a secure location where the potential buyer can review sensitive information. That location may be a physical location, or a secured website.
If due diligence moves forward, both sides may agree to close on a business sale.
Your team can help you make key decisions during the closing process.
A business broker will help you determine the value of your business, which is used as a basis for the sale price. The broker will negotiate the price, and the timing of the purchaser’s payments.
Another negotiation point addresses company debts and accounts payable balances. The buyer may assume these liabilities as part of the sale.
Your attorney will review all of the legal documents, and keep the document review process on track. If the negotiation does not result in a sale, the attorney can use the signed NDA to prevent a competitor from using privileged information.
Sell on Your Terms
You’ve spent years building a profitable business, and selling your company may be the most important financial decision you will ever make. Work with Raincatcher to protect the business you’ve created, and to negotiate an attractive sale price. Create a team to help you sell your business with confidence.