How to Sell Your Business to a Competitor Safely And Profitably
December 2, 2022
You might have never imagined you’d sell your business to a competitor, but it’s not that uncommon. It can especially come as a surprise if your competitor approaches you to acquire your business.
While there are risks associated with giving your business to a competitor, there are also benefits you wouldn’t necessarily have if you were to sell to a regular buyer.
By understanding how selling to a competitor works, you can take advantage of these benefits and earn a potentially life-changing sum of money on the sale of your business.
Why a Competitor Would Want to Buy Your Business
Your competitors are always looking over your shoulder. Therefore, they know your business well.
They can see its growth potential, so if the owner of your competitor is an active investor or is owned by a private equity firm that runs a portfolio of online businesses, they may see your business as an attractive investment asset. Their motivation to acquire your busines would be to scale its profits and potentially sell it on to generate a return on their investment.
Alternatively, your competitor could be run by a strategic buyer.
If you were to sell your business to a strategic buyer, they would probably bolt it on to their business—this is called the “bolt on” acquisition strategy. The buyer would leverage your business resources, assets, and audience to increase the sales of their business. Or they would keep your business separate from their business and simply rake in your business profits.
This is a strategy also employed by private equity firms to grow their business portfolios.
What a buyer intends to do with your business also depends on what type of competitor they are.
The 3 Types of Competitors Who Buy Businesses
Most competitors are trying to achieve the same goal: acquire as much market share as possible. There are three types of competitors your business has:
1. Near Competitor
Near competitors operate in a niche within the same industry as your business. You sell different products, but your audiences will have some overlap. For example if you run a busines selling pet food, a near competitor for you would be a business selling pet supplies.
A near competitor buyer would want to acquire your business for its audience so they can increase sales in their business.
2. Indirect Competitor
Indirect competitors offer the same solutions to the same audience, but with a different product. For example, if you have a business that sells resistance bands, an indirect competitor might sell dumbbells.
3. Direct Competitor
Direct competitors sell the same product or service to the same audience as you. An example is if you have a business that is a blog on travel gear, your direct competitor would also be a blog on travel gear.
There are situations where agreeing to the sale of a business to any of the types of competitors will be beneficial to every party involved in the sale.
Pros of Selling A Business to A Competitor
Because your competitors know your market, being open to the sale of your business to a competitor could actually help the business reach its full potential.
By bolting a business onto their business, a competitor is able to leverage the resources and capital generated by their business to boost the business they’ve acquired. Competitors also know your market well, so they have the expertise to identify the growth opportunities for any business within that market.
The process of handing over your business to a competitor is also a lot easier than if you were to sell to a non-competitor or investor unfamiliar with the type of business you run. Your competitors know how to operate other businesses within their niche, so they don’t need much hand holding to take over the business operations.
Because competitors understand other similar businesses, it means you’ll be able to get a quick sale as there won’t be much learning for them to go through in the sale process.
However, this strength could also be a danger depending on the motivations of a competitor for acquiring a competing business.
Cons of Selling A Business to A Competitor
There are some risks involved in selling your business to a competitor.
They Could Steal Business Information
Competitors may want to acquire a business for sensitive information about its sales and audience. They would use this business information to inform the growth strategies for their business. A competitor could also outright steal your customer lists and start trying to sell their products to your audience directly.
They Could Headhunt Your Employees
If your business has a team of employees, they may be carrying out the same business operations as your competitors. This makes them prime headhunting targets for their business.
They Could Close Your Business
The best strategy for a competitor to take more market share could be to acquire a competing business and close it down to eliminate competition.
They Could Let Go Of Your Employees
Naturally, you care about your employees and would hate to see them get let go, but depending on the motivations of your competitor, it might be in their best interest to let them go if they already have their own team in their business or they want to close the business down.
These risks are real, but don’t let them put you off agreeing to the sale of your business to a competitor. There are ways to protect a business during the sale process so every party involved walks away benefiting from the sale.
Going through the sale of a business to a competitor can be an emotional time, so it’s important to ensure you’re able to keep your emotions under control throughout the process the deal goes through until the end.
This can be a great opportunity for you, the business, the competitor, and everyone else involved. Before you make any moves on the sale of the business, ask the competitor what their motivations are with your business and consider what we’ve just talked about above.
If you’re happy the competitor has good motivations for the business, then you can go ahead with the sale process.
4 Stages of Selling Your Business to Your Competitor
The fundamental process of selling a business is the same whether you’re selling to a competitor or any other type of buyer. If you follow it thoroughly, you’ll keep yourself safe from any of the unique risks of selling to a competitor.
1. Prepare Your Business Assets
Just like any other buyer, a competitor will eventually need to see the financial and analytical information of the business.
You should prepare your information before starting the sale process. Preparing business information involves organizing your financials into a clean profit and loss statement. You can have a certified public accountant who specializes in the business model do this for you to make sure your finances are accurate.
You should also prepare your analytics ready for review. Install Google Analytics or Clicky a few months before going through the sale process if you can. This will allow you to collect a good amount of business information to present to a buyer.
The other assets associated with the business should also be prepared, including:
- Login details for all business accounts
- Email lists
- Inventory contracts
- Employee contracts
- All domains and their accounts
- Website hosting (make sure fees are paid)
- Website bugs (make sure these are fixed)
- Source code (make sure you have the rights to your software code)
Once you’ve prepared the business, it’ll be ready for a professional valuation.
2. Get A Professional Valuation For Your Business
A professional business valuer like a business broker will be able to tell you what you should get for the business when you sell. The value they assign to the business will be based on their understanding of business valuations and the market as a whole.
2. Protect Yourself With An NDA When the Buyer Does Due Diligence
After you’ve received your valuation, you’ll want to talk to an attorney.
They can help you prepare a non-disclosure agreement (NDA) which will protect your business confidential information from misappropriation.
The language used in your NDA is crucial to protecting your busines information. The information contained in an NDA can be interpreted differently in different states depending on their laws, so make sure you have an attorney prepare your NDA with the right information.
When your competitor is going through the process of assessing your business, they will need to see confidential information about the business. Share this out gradually as you go through the sale process to protect every party involved in the sale.
While your NDA will protect the business information, it’s still not wise to share all of the information at once. Share only the information they need to see at the due diligence stage they’re in and keep the rest confidential and share only when the competitor needs to see it.
3. Announce the Sale Of Your Business to Employees
If you have a team of employees helping run the business, it might be worth letting them know about your plan to sell.
It’ll be important for the competitor to know whether the team will continue working for the business after the sale so they can make arrangements such as assembling a new team of employees.
It’s also courteous to inform your employees so can know in advance and make decisions about what they would like to do. It’ll show you appreciate their hard work and will mean you can sell without any bad blood.
It might be a slightly different case if you hire virtual assistants or contractors, as they might not need as much notice.
Either way, be sure to time releasing the information right. If you tell your employees too early, the sale might fall through and it might make for a difficult situation if you continue to run the business. If you tell them too late it might come as a bit of a shock to the team and cause other complications.
4. Final-Stage Selling Negotiations
Once your competitor has gone through their due diligence on the business and is happy to close the sale, you can enter the next stage of negotiations.
At this point, you should ask the buyer to agree to a break-up fee arrangement. This is where the buyer will pay you a fee if they don’t go forward with the acquisition of the business.
When we facilitate the sale of a business, we implement a two-week handover period. During this time we hold the funds for the seller and migrate the business to the buyer. The buyer maintains control over the business for two weeks. If the business profits drop below 50% of recent performance, then the buyer can renegotiate the price of the business or pull out of the sale completely. If profits remain 50% or over, the buyer is obliged to complete the purchase.
Procedures like this require heavy regulation to ensure each party is treated fairly and within the boundaries of the law.
Sellers and buyers left to go through these procedures on their own can result in a lot of head clashing and financial repercussions. That’s why, at the very least, it’s best to get some professional advice and guidance.
Get Professional Advice to Help You Sell
The most important factor in facilitating a successful business sale is valuing the business.
Getting a professional valuation from an experienced advisor helps keep both the buyer and the seller on the same page and can prevent the need for damage control down the line.
Mergers and acquisitions (M&A) advisors can also provide guidance as you’re going through the entire sale process and keep you on track for a safe transaction.
Also, speak to an attorney to protect yourself and the business, and have a CPA organize your financials for you so no financial information falls through the cracks and complicates negotiations.
While getting advice from multiple advisors is a way to ensure a smooth business sale, there’s another way that’s easier, safer, and more reliable.
Why You Should Sell Through a Broker
Attorneys and CPAs can help you on the legal and financial sides of selling a business, but if they’re not experienced in online business M&A then they might not be the best advisors to help you successfully sell your business.
A business broker has experience in facilitating the sales and acquisitions of businesses. They know what legal structures need to be put in place, how to accurately value businesses, and how the whole sale process works from start to finish.
For example, we offer free exit planning consultations to help business owners prepare their business for sale before they even get a valuation, without any obligation to sell with us.
Our brokerage is made up of 80+ expert employees separated into departments designed for every stage of the business sale process, from initial business vetting and preparation, right through to business migration and collection of funds.
However, not all brokers are built like this.
Most brokers are paid commissions. Some are paid commissions on business purchases from buyers. For these brokers, their best interest is to get the buyer the best deal so they come back for more. That’s why some of these brokers promise business owners an unrealistically high multiple just to get them listed for sale, then they let buyers negotiate them down to a price that’s lower than the business’ actual worth.
Other brokers, like us, are paid a percentage of the sale price of the business from the seller. Some of these kinds of brokers will also promise high multiples to get businesses listed, but not us.
We have built our business on the value of facilitating the best online business deals. That means the best deal for the buyer and the seller.
We only list businesses that meet our criteria, which is why we reject over 90% of businesses submitted to our marketplace. In part, this is because we don’t want to list low-quality businesses, but it’s also because we won’t list a business if we don’t think we could have a buyer for it. We’ve even let sellers know upfront that we’re not sure if we can sell their business based on the buyer pool we have.
Transparency is one of our core values and is why we have openly shared our quarterly earnings reports.
The fact you pay a commission for a broker’s services has birthed a dangerous myth in the industry – what we call the “off-market fallacy.”
Some business owners falsely believe that since you pay a broker a commission on the sale of a business, they would earn more money on the sale of their business if they sold it privately.
In theory, this makes sense, but if you consider the whole picture, it’s not always true.
The best asset a business broker has to sell your business is their network of buyers. Our buyer pool currently has over $7BN in verified liquidity ready to be invested into online businesses.
How else would you present your business to such a huge network of capital-backed investors?
Because of this, business brokers are usually able to help you get the highest possible sale price. Plus, you get the benefit of the broker’s services, including business preparation and valuation, marketing your business to buyers, assisting in negotiations, handling the legal side of the sale, migrating your business, and collecting the funds.
The process of selling through a business broker starts with getting a professional valuation.
Get a Free Business Valuation
You can see what your business could potentially sell for on the market in just a few minutes with our free valuation tool.
Just share some details about the business and the algorithms powered by data from the sale of over 1,900 businesses will calculate a baseline valuation of what the business could sell for.
If you’d like to get the sale process started, you can submit your business to our team for review in just a few minutes.
If you’ve already received an offer from a competitor to buy your business, if you’d like us to facilitate the deal safely and help you earn the best-possible sale price, then submit your business for sale with us and ask your competitor to purchase your business on our marketplace.
