In today’s dynamic market, SME business owners are increasingly exploring exit strategies – and selling to a competitor can often emerge as a tempting, albeit complex, option. At first glance, the idea of handing over your business to a rival might feel counterintuitive. But under the right circumstances, your closest competitor could, in fact, be your most viable buyer.
In this article, we’ll explore why competitors might be interested in your business, the benefits, and risks of selling to them, and the practical steps to take if you decide to go down this route.
Why might a competitor be interested in your business?
Competitors may have a number of compelling strategic motives for acquiring your business, usually as part of a wider plan for growth.
Market share is an obvious motivation for a competitor acquiring your business, but it depends on how difficult it is to grow market share organically as to how much value they will place on this. If you happen to hold a virtual monopoly in a specific geographic area, for example, there is a rarity value to the acquisition.
Gaining customers, assets or talent might be particularly attractive to a competitor/acquirer if you hold a competitive advantage through a particular loyal client or rare skill set within your team.
Consolidation of the market is another common motivator. Sometimes, particularly in markets with relatively low barriers to entry and high numbers of smaller independent businesses, building up a portfolio is the quickest way to growth for larger organisations.
Understanding a competitor’s motivation is a vital first step in shaping your response and planning your next move.
Reasons to consider selling to a competitor
There are clear advantages to selling to a competitor, which include things like speed, valuation and fit.
- Faster Sales Process – A buyer who understands your industry will more quickly see the value in your business and understand how it works, this can speed up due diligence and negotiations.
- Stronger Valuation – In the right set of circumstances, a competitor may offer a premium price to secure market dominance or access strategic synergies.
- Strategic Fit – There can be a better chance of achieving a good fit between companies resulting in a smoother integration because of the level of understanding of the market and its challenges.
What are the risks?
Of course, selling to a competitor isn’t without its challenges. Here are some of the main risks to be aware of:
- Exposure of Sensitive Information: This should always be handled very carefully with the right protections in place, but it does become riskier if there is competitive advantage to be gained. It’s vital to keep the deal on track and make sure it completes.
- Buyers Motives: While competitors can make strong offers in the right circumstances, they can equally see less strategic value in the acquisition, being more interested in simply removing a competitor than growing your business.
- Employee, Client and Supplier Concerns: This boils down to your motivation as a seller and what your priorities are for the deal. Many business owners find they are equally concerned about the future of the business, employees who have helped you grow, clients who have become friends and suppliers who you have leaned on over the years. An acquirer who is a competitor is less likely to maintain the status quo in these areas, so worth bearing that in mind if this is a priority for you.
These risks can be managed – but only with the right safeguards in place and the support of experienced advisers.
Is selling to a competitor the right choice for you?
Without question, competitors should form part of your strategy for selling your business as their presence in the mix will help support choice and a competitive environment. But, before making a decision as to how seriously to treat any resulting interest, take time to reflect on your own goals for the sale.
Consider if there are any red lines that would make you feel uncomfortable about a competitor approach and be really clear about the outcome you want to see. For example, what are the intentions of a competitor buyer, are they looking to grow your business, or simply phase it out?
What are the alternatives?
Our advice would always be to keep an open mind, especially at the start of the process – competitors are just one type of buyer for your business. There are several other options worth considering, including:
- Complementary Businesses – a particularly interesting pool of buyers who are defined by having similar traits but without being directly competitive, i.e. they sell different products to the same type of clients.
- Private Equity or Investment Groups – these buyers are often looking for very specific criteria, but if you happen to meet these criteria, they can be good acquirers offering growth capital and commercial expertise.
- Management Buyout (MBO) – if you have a strong management team and don’t mind giving them some support in funding the acquisition this is a good way to keep the business in the hands of those who already know it best.
- Employee Ownership Trust (EOT) – there are a host of benefits to selling the business into employee ownership, but it isn’t the right choice for everyone – seek some honest professional advice to see if it could work for you.
Each option comes with its own pros and cons, so it’s important to match the route with your personal goals, business traits and value aspirations. More information on choosing the right exit strategy for your business can be found in our other blogs.
The role of professional advisers
Surrounding yourself with the right support team can make all the difference in terms of getting the right advice on your options, legal support, financial support as well as managing the process of identifying buyers, negotiating and structuring the deal. Our other blogs offer further insight into the role of an M&A Adviser
How to protect your business during the sale process
Whether you end up selling to a competitor or not, it is critical to maintain stability and avoid exposing yourself to unnecessary risk during the process. Here are our four top tips:
- Share sensitive data only when necessary – make sure you have a strong NDA (Non-Disclosure Agreement) in place before sharing anything
- Include non-compete clauses in your agreement
- Keep the business performing well to maintain its valuation
- Reassure your staff with clear, calm communication – carefully think through your messaging and only share your intentions at the appropriate time
Making the right decision
Selling to a competitor can offer a fast, strategic, and lucrative exit, but it’s not without its complexities. By understanding both the opportunities and the risks, and working with experienced advisers, you’ll be well placed to make the right call.
Entrepreneurs Hub has supported hundreds of UK business owners through successful exits – including transactions with competitors. If you’re ready to explore your exit strategy options, Entrepreneurs Hub offers a free, no-obligation consultation.
Contact us here and let’s talk about how we can support you in navigating this important decision and planning for a successful business exit.
