Planner: Sell to a competitor

Here are some ideas and talking points to help you connect the planning dots with your clients. There are three Planners in this series, each outlining different ways a business owner client could transition out of their leadership roles and move a company to new ownership.

Competitors can make natural buyers, since taking over your business lets them to expand, while eliminating a rival.

Before going this route:

• Get signed confidentiality agreements prohibiting potential buyers from using information you provide for anything other than assessing the acquisition.
• If you plan to reveal sensitive information—such as historical financial statements, customer lists and sales prices, gross margin by customer, and employee compensation—get the same data from the competitor. That keeps negotiations on an even footing.

Pros:

• Speed. The buyer understands the industry, so it’s a shorter learning curve than for an outside buyer. The due diligence process is often shorter too, so the deal can be done quite quickly.
• Competitors often pay premiums to shut down rivals. If profits have been soft lately, this can option often leads to the highest payout.

Cons:

• Confidentiality issues. There’s always the danger competitors might access sensitive information and then bow out of a deal. To manage that risk, request a deposit, which would be forfeited if the buyer backs out for no valid reason; but be aware such clauses can be difficult to enforce.

• Nickel-and-diming. If a business is profitable, a competitor often sees a purchase as bringing it only a few new customers, and some key employees. This perception of duplication means they may be reluctant to pay as much as an outside buyer. Try to determine if this is the case early in negotiations. If they start to talk cheap, walk.