Why Selling Your Business to a Competitor is High Risk

Sales to your competition should generally be a last resort

The phone call takes you by surprise. It’s your single biggest competitor and they want to talk about making a deal.

Depending on where you’re at professionally, such a scenario may sound tempting. After years of hard work, a seemingly ready-made exit to your competition might sound like the path of least resistance. A golden parachute.

Sadly, that’s often a mirage. Your “easy off-ramp” is often a bottomless pit of problems that should have been easy to foresee.

Selling to Your Competition: The Secret Spy Mission

To understand why selling to a competitor is fraught with potential problems, put yourself in your competitor’s shoes, and imagine you’re the kind of person willing to deceive to get a competitive edge.

What better way to do so than by posing as a buyer when your only real motivation is to operate as a spy? Business intelligence should be zealously guarded, but owners who are eager to hit the exits sometimes give away the store. Your competition will peer into your books and gauge your financial strength. Your customer list, vendors, margins and pricing? All open to prying eyes. And they WILL pry.

Then, the deal suddenly falls apart, with the buyer citing concerns about timing or numbers. The next step? They’ll take everything they’ve learned and use it to optimize their business against yours. You’re left standing there with the worst of all worlds. You’ve wasted time, made your competitive position weaker, and potentially lowered your future valuation.

And your unscrupulous competitor, armed with your whole playbook, is laughing at how easy it was. They can undercut you, go after your client list, and imitate your best business practices. The worst part of it? There isn’t anything you can do about it.

Here’s the stark truth: Even honest buyers will glean real intelligence. Giving that opportunity to a rival is exceptionally risky.

Of course, that’s not the only reason why competitor-buyers should usually be shunned.

Competitors Don’t Like to Pay a Premium

Every seller wants a good deal. Strategic buyers often pay top-of-market because they need something special: An entry to a new market, or some kind of complementary business aspect that you bring to the table. So paying a premium is easily justified and routinely done.

Competitors, on the other hand, are more likely to look for discounts, let alone pay you a premium.

Why? Strategics see the enticing upside of new opportunities while competitors see downsides. Why pay a premium when they can poach your customers? Why pay a premium for duplicate infrastructure and management? In many cases, they view the deal as paying you to go away. They may believe they can grind you down in the marketplace eventually, so all you really represent is an accelerated convenience.

As the deal progresses, they will make this mindset abundantly clear, going line by line and explaining exactly why some of your assets hold little to no value for them.

You generally don’t want to go down this road. The strategic buyer who sees unlimited opportunity is more motivated than the competitor who wants to strip you for spare parts.

What Happens to Your Workers After a Competitor Sale?

Along with business intelligence and valuations, the fate of your loyal workers often looms high in the minds of owners. Nobody wants to see people put out of work, or left to flail under unscrupulous new ownership.

Competitor purchases can be especially tough on your team. A strategic buyer needs all the institutional knowledge and trade skill it can get. This means your workers are valued at a premium. They are indispensable for a smooth transition.

Competitors already have their own people in place, which gives your team much less leverage, and exposes them to more layoff risk. All those management redundancies need to be worked out, and their people will almost certainly take priority over yours.

If you decide to stay on during the transition, you may have to watch your people get marginalized or fired. That can take a significant emotional toll, given that these are the people who worked with you side by side for years. And, if you have an earnout and it’s tied to performance, the loss of so many talented people can reduce your payout as well.

Other Factors to Consider When Selling to Your Competition

There are a few other things to consider when selling to a competitor. In some industries, such sales may invite regulatory scrutiny. If your businesses are large enough and control enough of the market, there may be onerous conditions imposed on the sale, or you may be stuck in limbo for months or years waiting for the green light.

Competitors are also generally more eager to impose non-competes. They know how savvy you are about the industry, so they want to protect themselves by limiting your ability to come after them in the future. A strategic is less likely to care and less likely to impose stringent conditions on what you can do and can’t do from a new business perspective.

This flexibility may be important, because your industry expertise can be extremely valuable. If you can’t start a new venture or even consult or advise, you may find yourself sitting out some of the best years of your career.

Does it Ever Make Sense to Sell to Your Competition?

In a word: Occasionally. If your business is in a weak competitive position, buyers are scarce, and you need a fast exit, then it could make sense. Every sale is different. It’s also possible that combining the two companies makes so much sense that it creates an incentive for a premium valuation.

Just remember, such scenarios are the exception. You should explore every option, or ideally hire someone who has the ability to create a market for you. The more options you have, the better the outcome. And, whatever you do, don’t let your very first call or meeting be with your competitor. That’s rarely a smart decision.

Your Next Move

We’ve been in this business for 25+ years and we’ve seen it all. One of the single biggest mistakes owners make is failing to view the situation from the potential buyer’s eyes. Your competitor isn’t there to help you out; they are seeking to eliminate you as cheaply as they can. And that’s the best case scenario, as they might simply want to steal information before leaving you high and dry.

The best way to sell to a competitor successfully? Treat all overtures with skepticism. Don’t rush into anything. Call an industry professional who can create the largest pool of buyers willing to pay the largest premium.

That’s what we do at Sun Acquisitions, where our extensive network of buyers has been painstakingly built over decades. We know how to position your business, how to market your business, and who makes sense as a buyer.

Taking a strategic, professional approach will help ensure that you avoid unforced error and get the best possible outcome for everyone (except your buyer, of course).