Why selling to your competition requires a special kind of diligence compared to other types of buyers
You’re ready to sell your business and there’s good news: You’ve already got a buyer showing interest. There’s also a catch: He’s your toughest competitor and he’s been trying to put you out of business for years.
You’ve just stepped into one of the trickiest scenarios that exiting business owners face. If you do your diligence (including reading this article) it might be the easiest sale you’ll make. Fail to prepare, and you may end up giving away your trade secrets and watching your best clients and workers get poached, right before the “buyer” leaves you at the altar.
After 25+ years in the business, I can tell you that I’ve heard too many stories of that exact scenario unfolding. Often the seller ends up in a far worse position, with a competitor who has now peered beyond the curtain to see every one of your vulnerabilities.
With that in mind, let’s talk about how to ensure a competitor sale works to your benefit, not your detriment.
How to Sell to a Competitor Successfully: Four Smart Tactics
Timing is Everything
The first thing to focus on is the order in which you market your business. It’s very straightforward: Don’t talk deal with your competition first. They should be last in line. That may sound counter-intuitive given that they can generally move the fastest (given their pre-existing industry knowledge and your overlapping businesses) but it’s also smart advice.
Going to strategic buyers or other types of buyers first gives you leverage. Your competitor is naturally going to have some trepidation about just who might be lining up to buy your business. A deep-pocketed financial buyer or a strategic that is a powerhouse in an adjacent industry could present ferocious new competition that your competitor is leery about facing.
If your competitor finds out that other buyers are circling, that’s going to spark concern about their identity and fear of missing out on the deal. Those psychological elements create leverage and higher valuations. It prevents the classic “slow rolling” tactics competitors use to glean information from you. So, bottom line? Put them at the end of the line.
Control the Flow of Data
Next, safeguard your information zealously. Your competitor is already armed with far more information than the average buyer. They know the market, they know you, and they know the dynamics at play. Of course, they’ll overlook all of this and demand as much data as they can to gain a strategic edge.
They want to probe for your weaknesses, identify clients or vendors to poach, and get an up-close look at your operations. What they discover might cause them to walk away even if they are negotiating in good faith. For example, what if they discover several of your key clients will be out of contract shortly? They can just call the sale off and leverage what they just learned against you.
Instead of falling for this, dole out information slowly and as-needed. Only give what’s necessary. Guard your sensitive data (client names, vendor contracts, IP etc.) until you have solid commitment from them, either financial or on paper. While buyers who are anxious to exit might be willing to overshare just to move the process along, that’s a tremendous risk that should be avoided.
Don’t Believe the Hype
You should also take everything you hear with a major grain of salt. Buyers (who are really just spies) will raise the prospect of sizable multiples or express their excitement about the sale, knowing full well it’s a charade. Before you give them the golden key, make them prove those words. Ask for letters of intent with detailed information and a break fee. This can weed out the actual buyers from the snoopers.
When selling to a competitor you should also be willing to hit the eject button. If you think games are being played, stop the process. If your buyer is demanding to meet with employees or clients before the deal closes, or shows signs of slow rolling due diligence, peppering you with endless requests that seem outside the bounds of typical requests, then you need to have the resolve to walk away at once.
Other Tactics to Deter Bad Faith Buyers
You can also take your own steps (let’s call it “counterintelligence”) if you sense things are amiss. You can leave misleading information (not fraudulent information) in a data room and see if that information is used by the competitor. If so, they may be mining.
You can also insist that the major players are involved from the LOI stage on. A fishing expedition is likely to be run by lower-level executives.
Fortifying your retention agreements, change-of-control provisions, and other key contracts can also create obstacles that make a fishing expedition less effective.
Your Next Move
A competitor sale often works out spectacularly well in the end. It can be a much faster and easier process. The risk inherent in these deals is much greater, though, so you must tread carefully and protect your business. Don’t let emotions or the desire to accelerate the process lead you down a bad path.
Instead, protect yourself through every step of the process and treat your competitor not merely as a potential buyer, but as a potential buyer who is actively trying to out you out of business.
Make sure they stay honest and keep them on a tight leash, and you’ll get the result you want.
Now that you’ve learned the basics about how to sell to a competitor successfully, please feel free to reach out to Sun Acquisitions for a free consultation, or review our extensive library of educational resources.
