What Do I Need to Keep in Mind if I’m Considering Selling to a Competitor?
Strategic buyers like competitors are often great fits, as they are often willing to pay a premium for synergies between the current business and yours and because they perceive less risk in a familiar industry.
As current industry participants, they can have the capital, infrastructure, and experience to fuel post-closing growth, retain your employees, and safeguard your legacy.
So, what are some things to keep in mind if you’ve received an unsolicited overture from a competitor or are further down the road?
VALUATION. Understand your business’s worth by engaging an M&A advisor to assist with a market analysis. You need to understand the synergistic value the business has for the buyer, and whether their offer reflects a premium or is a predatory one.
NEGOTIATIONS. M&A negotiations involve a complex blend of financial, business, and legal terms, and you need to have professionals in your corner. The assistance of an M&A firm like Sierra Pacific Partners can help. We’ve seen hundreds of deals, and can help guide you to the best exit.
PROCESS. Usually, it makes sense to engage an investment banker to help run a process for your company, discreetly reaching out to a select list of other potential buyers while negotiations continue with the initial suitor.
The goal is to drive competition for the business, so that you receive multiple offers, leaving the company in the best position to get the best price and terms with a buyer that’s a good fit.
CONFIDENTIALLY. The need to protect competitively sensitive information is paramount. This can include everything from customer lists to suppliers to pricing to employee identities.
You should absolutely get a non-disclosure agreement in place before sharing any confidential information, and your M&A attorney should help with negotiating the NDA. NDAs are not form documents for lower middle market transactions, and they’ve been known to contain traps from time to time, including exclusivity provisions that prohibit sellers from marking the business.
As a practical matter, an NDA is a piece of paper, and it can be difficult to prove violations. Plus, once information, it’s impossible to unring the bell.
For that reason, despite a strong NDA, it's imperative to employ controlled or phased disclosure, sharing confidential information gradually and only as necessary to advance the negotiations. This often includes starting with anonymized information and progressing to fuller disclosure as closing becomes more certain.
REGULATORY CONCERNS. Be aware of potential antitrust issues, especially if the merger decreases competition in the market.
POST-CLOSING PLANNING. Clarify your role in the business post-acquisition, if you intend to remain involved. Also, discuss and plan how to integrate the two companies. Develop a clear communication strategy to address the concerns of stakeholders including employees, customers, and suppliers.
Selling to a competitor can be a great option, but because the stakes are higher, it’s important to get the process right.