Selling your business to a competitor can be a great exit strategy. It allows you to get the full value for your business while passing it on to someone who can take it to the next level. Here’s a step-by-step guide to selling your business to a competitor:
Do Your Research
First, you’ll want to identify potential competitor buyers and do some research. Make a list of competitors or similar businesses that may be interested in acquiring you. Do they have the financial capability to purchase your company? Have they bought companies before? You can check sources like industry publications, news articles, and SEC filings to learn more about potential acquirers. This will help you narrow down the list to viable options.
Analyze Your Business
Next, do a thorough evaluation of your business’s financials, operations, assets, growth potential, and value drivers. Pull together financial statements, tax returns, customer lists, contracts, intellectual property, and anything else a buyer will want to review. Identify strengths that make your business more valuable, like proprietary technology, high-margin products, loyal customers, and skilled employees. Being able to articulate your business strengths will help you negotiate better terms.
Determine Your Asking Price
You’ll need to settle on an optimal asking price – this is what you’ll propose to potential buyers as the acquisition price. Factor in assets, revenue, profitability, growth, competition, buyer synergies, and the current market landscape. Be prepared to justify your valuation with financial modeling and comparables. A business appraiser can provide an independent assessment. Build in some negotiation room, but avoid going too high or low.
Approach Potential Buyers
Once you have all your ducks in a row, create a prospectus summarizing your business’s history, financials, operations, and strengths. Use this to begin reaching out to your list of potential acquirers, either directly or through an intermediary like an M&A advisor or investment banker. Sign NDAs before providing confidential information. Present yourself as open to acquisition overtures but not desperate to sell.
Negotiate the Deal
If buyers express interest, provide them with the due diligence information necessary to evaluate the business. Expect the buyer to do exhaustive verification of your financials, customer contracts, intellectual property, inventory, etc. Be responsive to their requests and questions. Maintain composure – don’t get defensive if they push back on your valuation. Work with your M&A advisors to negotiate deal structure, purchase terms, timeline, representations and warranties, indemnifications, earn outs, and other details.
Close and Execute
After arriving at agreeable deal terms, it’s time to close the transaction. This involves entering into a purchase agreement detailing all terms and considerations. Work closely with your legal team to execute the closing process – transferring over assets, finalizing financing, onboarding employees, communicating with customers and vendors, integrating systems, and more. Develop a transition services agreement to ensure a smooth handover period.
Selling your business to a competitor has major advantages if executed strategically. It can unlock significant value built up in your company while avoiding a lengthy sale process. With thorough planning and professional guidance, you can negotiate an optimal deal that achieves your financial and legacy goals. Reach out to experienced M&A advisors who can help advise you on valuations, prospecting, negotiations, legal matters, and more. Selling to a competitor could be your best exit strategy.
Key Steps When Selling to a Competitor
– Identify potential competitors who may be strategic buyers
– Perform an objective valuation of your business
– Prepare financials, contracts, IP, and other sale materials
– Craft a compelling summary prospectus
– Sign NDAs and provide info to serious buyers
– Negotiate deal terms like price, structure, and timeline
– Work with lawyers to execute the purchase agreement
– Develop a transition plan to integrate the two companies
What is the Process of Selling to a Competitor?
The process generally includes these key steps:
1. Research potential competitor buyers
2. Analyze and value your business
3. Set an optimal asking price
4. Create a prospectus to approach buyers
5. Sign NDAs and provide due diligence info
6. Negotiate price, terms, representations, and closing timeline
7. Execute the purchase agreement and transfer assets/ownership
8. Develop transition plan and services agreement
An experienced M&A advisor can help guide you through the process of selling to a competitor. Valuation experts can also provide an objective business appraisal. You’ll want to work closely with lawyers to negotiate and draft the purchase agreement.
What Should You Include in an Information Memorandum?
An information memorandum (IM) is a sales document provided to prospective buyers when selling a business. Here are some key items to include:
– Executive summary: Overview of business, history, products/services, and reason for sale
– Company overview: Description of business operations and organizational structure
– Products and services: Details on product lines, services, patents, contracts
– Financial statements: Historical P&Ls, balance sheets, cash flows for past 3-5 years
– Financial analysis: Growth trends, profitability, valuation, key performance metrics
– Customers: Customer segments, Concentration, retention, growth
– Employees: Organization chart, compensation, and bios of key personnel
– Assets: Details of facilities, equipment, intellectual property, inventory, brands
– Risk factors: Operational, financial, legal risks or liabilities of the business
– Growth opportunities: New products/services, markets, partnerships, M&A
– Competitive analysis: Analysis of competitor strengths and weaknesses
– Asking price justification: How valuation was derived and comparables
The IM provides buyers with a comprehensive overview of the business, financials, operations, strengths, risks, and potential. This enables them to evaluate the opportunity.
What are Some Negotiation Strategies when Selling a Business?
Some key strategies when negotiating the sale of a business to a competitor include:
– Get multiple bidders to create competition. Having other offers on the table gives you leverage.
– Maintain your poker face. Don’t reveal your walk-away price or minimum acceptable terms.
– Start higher than your target price. Anchor the negotiations to a favorable number.
– Structure the deal creatively. Consider earn-outs, seller financing, contingencies, and installment payments.
– Focus on common interests for a win-win deal. Emphasize benefits to the buyer of keeping your workforce, brands, and customers.
– Remain calm and patient. High-pressure tactics could be a sign of desperation.
– Lean on advisors to negotiate so you can play “good cop.” They give you plausible deniability on tough stances.
– Don’t make concessions without getting something in return. Come prepared with reasonable counteroffers.
– Keep alternatives open. Be willing to walk away from lowball offers if you have other exit options.
– Get everything in writing before closing. Verbal promises often evaporate without legal documentation.
The best deals leave both buyers and sellers feeling like they maximized outcomes according to their core interests.
Selling your business to a competitor can be an appealing exit strategy that unlocks the full value you have built. With the right planning and preparation, you can be confident negotiating a deal that achieves your financial and legacy objectives. Do thorough research on potential buyers, understand your business value drivers, assemble a solid prospectus, lean on advisors, and maintain negotiation discipline. With strategic dealmaking, you can craft a win-win acquisition resulting in a successful company sale to a competitor buyer.