Addressing the Fears of Selling Your Business to a Competitor
When presented with the concept of selling their business to a direct competitor, many business owners are filled with fear. Why would a competitor want to buy my business? What happens when a competitor finds out all of my business’ secrets? What happens if I lose my biggest customer to my competitor? All of these questions and many others are front of mind when business owners consider the concept of selling their business to a major competitor.
On the other hand however, in many cases a competitor is often the perfect strategic buyer for a business. Competitors will often gain a great deal of synergies from acquiring a business, including increased market share, additional skilled management personnel, access to additional products or services, and the custom of key clients held by the company which they are acquiring (which they may have been attempting to secure for years). These strategic advantages often mean that a competitor is willing to pay a premium to acquire a business which is great news for the seller.
So, how can you approach a direct competitor regarding the sale of your business, and negotiate with them to secure a favourable outcome without damaging your business? Below we discuss some key strategies that can be used to make this a reality.
Understand Your Competitor
Before any approach is made to a competitor regarding the potential sale of your business it is vital that you understand as much as possible about your competitor’s business. As part of this, it is useful to potentially engage in discussions with mutual suppliers to scope out how your competitor has been performing. Even better, if your competitor’s financial statements are publicly available, you can review these to understand whether your competitor has the capacity to acquire your company or not. Further to this it is maybe useful to analyse what synergies and economies of scale may be available to your competitor should they choose to acquire your company. By understanding the benefits that your competitor will gain from acquiring your company you are better placed to present your company in a favourable light to your competitor as part of the sale process.
Use an Intermediary
The simplest way to approach a competitor and seek out their interest in potentially acquiring your company, without that competitor knowing that your company is for sale is to use an intermediary like an M&A advisor. An intermediary can confidentially approach the target company, seek out their initial level of interest (generally by engaging in a confidential telephone discussion with the target company), and move to put in place a strict, binding confidentiality deed with the target company prior to any meaningful conversations taking place.
Use a Watertight Confidentiality Deed
Many business owners dismiss the value or reliability of confidentiality deeds. However, when negotiating with a direct competitor the use of a strict, watertight confidentiality deed can help alleviate any issues that may come up when releasing information to the competitor about your business and completing your negotiations. A good confidentiality deed will ensure that financial remedies can be sought should damage be done to your business by action of the competitor, and allow for court injunctions to be made should breaches to the confidentiality deed be threatened. This provides an added blanket of security to the selling company prior to engaging in any level of serious negotiations or discussions with a direct competitor.
Release Information in a Controlled and Careful Fashion
Once you have executed a confidentiality deed with your competitor, the competitor will likely need to review a certain degree of business information relating to your company in order to make an assessment of whether or not they make an offer to acquire your company, and if they are making an offer to acquire your company what that offer will be. When releasing business information to a competitor you should be conscious to only release the minimum amount of detail that would enable the competitor to make a non-binding offer. Business owners should be careful about releasing key information such as sales margins, key client names, and management salaries to competitors prior to receiving a formal offer. Companies should also be conscious of the fact that quite often, competitors will already hold a reasonable degree of knowledge about your company, limiting the amount of information that needs to be provided as part of this process.
Negotiating an Offer with a Direct Competitor
As previously mentioned, a direct competitor will normally gain a range of strategic advantages from acquiring your company. On this basis, when negotiating with a direct competitor business owners should push for a price premium that is over and above fair market value to account for the synergies and economies of scale available to the competitor.
We have significant experience and expertise in successfully selling companies to direct competitors. Should you require advice in this area please call us on 1300 QUINNS (784 667) or submit an Express Enquiry to arrange a confidential no cost consultation with one of our Directors.