Whether you’re ready for retirement, starting a new business, or simply exiting your industry, selling your business to a competitor can be a difficult path to navigate.
Although you might think that the process is the same as a regular business sale, selling a business to a competitor requires unique due diligence. And if you’ve never gone about selling your business to a competitor before or haven’t ever sold a business, there are many factors to bear in mind. Just as buying a business will require specific know-how, selling a business will, too—especially when you’re dealing with a competitor as a buyer.
What Types of Competitors Are There?
In business, there are usually three types of competitors that exist:
The type of competitor you choose to sell your business to will depend on various factors. Most times, business owners will prefer to sell their business to near competitors because they feel that they are not typically out to hurt their business as opposed to the other two types of competitors. Regardless, you must always take precautions when selling to any competitor.
What Are the Benefits of Selling to A Competitor?
For some, it may be a bitter pill to swallow, but there are many benefits when done successfully. As someone who intends to sell a personal business, you’ll often get the best deal at closing and a far quicker sale by starting with competitors. If your company has proven to be profitable, competitors will pay more for it than a third-party buyer because they will have a better appreciation of what you have to offer. They are often the most qualified buyers and may pay significantly more than the market price if they have the resources to scale the business and foresee an excellent and speedy return on investment. Also, competitors typically have no problems obtaining loans to purchase other companies. Sometimes they will even have the cash available to buy the business outright. In that instance, it’s a win-win scenario for both parties.
Your competitors are already in the industry, and likely have valid finances and a healthy reputation in the niche. Subsequently, you won’t have any hassles conducting a credit or reference check on them.
In addition, by selling your business to a competitor, you will be guaranteed that it is in capable hands because they already have a similar undertaking in the same industry. For some sellers, the price may seem like the only necessity, but down the line, it’s in your best interest for the business to continue thriving and growing for your reputation and legacy.
What Options Do You Have When Selling a Business?
It is good to note that selling your business does not necessarily translate into selling the whole company. Sometimes, a business owner may want to sell their inventory or asset to a competitor to liquidate quickly. These deals are advantageous to your competitors because they are cheaper for them and can benefit your business in some cases.
In other instances, you may structure a deal where you retain equity, take some chips off the table, lighten your workload, but still keep a piece of the pie – a pie that may become a tastier prospect in the future.
What Are the Risks of Selling Your Ecommerce Business To A Competitor?
Even though selling your business to a competitor has a lot of advantages, it is not without risks. One of the significant risks you will face is that buyers will make information requests. This information typically pertains to specific details about the stakeholders of your business. For example, they may want to obtain information related to company patents, employees, or even customers’ names.
The risk you have when you’re selling a business — if things don’t fall into place and the deal goes sideways — depending on how far down the line they get — is that they’re going to have exposure to virtually everything you have or a business owner has to run their business. These include names of critical employees, access to vendors, gross profit margins, any proprietary processes that have been developed, and perhaps key contractors outside the scope of employment. It could be somebody who does freelance work but is highly talented. So those are all things that need to be prevented and protected.
These types of information are highly sensitive and can be detrimental when they get out, especially when a competitor gets their hands on it. It is not unheard of for a competitor to pretend that they are interested in buying a business when all they have in mind is to obtain valuable information.
Once this happens, they will likely back out of the deal and take your information for their benefit. You certainly wouldn’t want this to happen because it could make your competitors stronger and your business weaker.
How Do You Protect Yourself and Get Maximum Value?
Regardless of whether you’ve sold a business before, having the guidance of an experienced broker to navigate these unchartered waters is undoubtedly in your best interest. Non-disclosure agreements and LOIs, for example, will offer some protection but knowing which information to share at what stage of the process is crucial.
Just as you’re an expert in your field, a good broker has dealt with hundreds of acquisitions of all kinds and has the experience to protect you, get you the fastest sale, soundest legal advice, highest multiple for your business, and various other benefits.
WebsiteClosers.com is a full-service brokerage. Our team of attorneys, accountants, consultants, and serial entrepreneurs have sold close to a billion dollars worth of Tech and Internet companies, ranging from $500,000 to $200,000,000. These include software companies, Amazon and eCommerce businesses, Websites and Domains, Technology and IP Companies, Business Services, Internet Businesses, MSP and IT Solutions, Web, App & Software Development, and Advertising and Marketing Services.