Preparing to sell your business can be an emotional rollercoaster ride, and the last thing you may consider during this time is selling your business to a competitor.
When people think of selling to a competitor, we often think of large corporations that slug it out and industry consolidation—the big seeking to get even bigger.
However, for small businesses, the environment is significantly different. Some of the entrepreneurs of these small businesses may know another personally and often live in the same community. These businesses usually cooperate to meet customer demand to ensure customer satisfaction. Entrepreneurs of small businesses may even refer customers to their competitors if they know another business can offer a better price or service.
Selling your business to a competitor can make the transition a little bit smoother or more straightforward. In fact, you may even consider it your best option, rather than your last.
Selling to your competitor offers a unique set of advantages and disadvantages. This consideration may help you decide you approach as you think about exiting your business.
The Pros Of Selling To A competitor
Your competitor may be one of the more qualified buyers in the market. They already know enough to run your business and will not require much time to adjust. They experience almost the same thing as you and will understand how to handle certain situations. Moreover, they could also provide a fresh perspective that may help your business grow over time.
Your competitor may also be interested in buying some or all of the assets of your business. Again, it can benefit them since these fixed assets can also help grow their own business.
If you play your cards right, selling to a competitor can be more lucrative for you. Small business owners struggle a bit more to stay afloat than larger businesses and corporations. Therefore, it would be beneficial for their business to spend less on marketing to compete with your business or offer discounts every now and then to boost sales.
When it comes to financing the purchase, a solid business can be used as collateral to obtain an SBA loan which can be an advantage other prospective buyers do not bring to the table.
However, it is important to understand there may be some risks. Therefore, it’s always necessary to make an objective decision that is favorable for you, your employees and clients, and your business as a whole.
The Cons Of Selling To A Competitor
The cons of selling to your competitor boil down to intention. You may have referred clients to each other or formed a great friendship or co-opetition. However, it is best to understand their intention and interest in buying your business.
Some competitors may buy a business to access certain company assets or insights-without retaining the employees, suppliers, or customers. Other competitors may seek to buy your business to remove competition without taking care of your business’ legacy or standing in the local community.
The best way to prevent this from happening is to ensure that both you and the buyer are on the same page and agree to important non-commercial terms related to employees, servicing key clients, etc., in writing.
Tips When Selling To A Competitor
When taking steps toward a formal transaction, here are some important things to keep in mind.
Secure a proper valuation to keep control.
It is best to get a proper valuation of your business so that both you and your competitor are aware of its market value. This provides an objective starting point for negotiating a sale price versus using a ballpark figure that could result in your competitor lowballing you. In addition, having the valuation will help provide structure to your negotiations.
Procure an NDA.
Securing a Non-Disclosure Agreement can protect you from a competitor taking advantage of your business’s confidential information. Remember to share information when it is required during the due diligence process. For example, you may want to wait to disclose sensitive information like finances, strategies, and your customer list when you have high certainty the buyer is serious.
Ask, ask, ask!
Make sure to ask questions to validate your competitor’s interest in your business. Information gathering helps you have a more objective view of their intentions. You want to ensure that your business’ legacy is maintained. Get to the bottom of your competitor’s plan for your business, clients, and employees.
Be the captain of the ship.
Going through a business transition process is tough work and may take up most of your mental and emotional space. It is a balance to focus on your exit and still be there for the day-to-day operations of your business. Have enough attention and energy to keep your business afloat and handle everything before a sale.
These are just a few tips to help you if you are considering selling to your competitor. At the end of the day, you make the final decision you think is best for your business. Before arriving there, it will be helpful to look into different options to find the best one. All the best on your journey!