Selling to a Competitor: Analyzing the Risk-Return Trade-offs

We’ve a current client who maintains an unshakable fear that even performing “blind” outreach to the competition will somehow collapse his well-built business. Somehow another M&A consultant–thinking it would help him get the opportunity filled him with a load of crock that you never, under any circumstances, sell to the competition. Certainly a large dose of caution is required when looking for buyers within a small competitive pool, but avoiding the competition may be a massive detriment to getting a strategic M&A deal done at all. He was fed this malarkey by another advisor hoping to showcase his prowess and win the deal engagement. In doing so, he created a monster which we had to deal with.So, now our task is to undue the false indoctrinated brainwashing of our client, which may prove highly difficult.

Let’s discuss when it’s okay and when it would be a bad idea to sell directly to a competitor. First, let’s discuss our client’s business. He sells a high-volume, low-margin commodity –a company which would be difficult to do detrimental harm to even if you tried. Even if all his buyers and suppliers outright knew he was for sale, I rightly doubt it would change their buying and selling habits. Like any commodity-based product, they’re more concerned with price than the name of the company to whom they right the check.

Commodity businesses are perhaps one of the best markets where selling to a competitor is not a bad idea at all. Where no differentiation exists, the risks are far lower.

On the other hand, here are some businesses with more differentiated models where selling to a competitor becomes much more tricky:

  • Technology business with Intellectual Property
  • Staffing companies where employment is in high demand. This can be particularly sensitive in software staffing.
  • Customer-centric services companies

In short, any company or industry where information is king should think twice about selling out the competition. If the competitors show interest, certain care should be taken with confidential and privileged information. If the info being requested by a direct competitor does not have sway on determining value, then the seller should be particularly cagey about releasing such information. The big question is relevance:

Will the data they are asking for contribute to their ability to make a judgement on the business value or could it potentially aid them in causing harm to the business?

NDAs or Confidentiality Agreements aside, protecting the business is often more important than getting a deal done.Even in specialized industries, selling to a competitor, unless they’re completely cutthroat still may not kill the business, but treading lightly is still advised, given that there are built-in incentives to screw you by steeling customers or employees prior to your deal closing. The incentives for steeling customers and/or employees becomes even more intense, the closer the competitor is to your business geographically and customerly (not a word, but I think it should help to get the point across). The point is, there are risks and such risks could be very different depending on the industry. Some such risks in pitching your M&A deal to a competitor may put customers, employees, suppliers or products at risk or it may endanger all four. Typically owners know their businesses weak spots the best. Doing a thorough “what if” in worst case scenarios may prove a helpful exercise when prepping to sell the company.

Some of the best strategic acquirers willing to pay a premium for the business will likely be competitors. Hence, completely avoiding them could be the worst decision you make in the process of preparing your business for sale. Just be sure to exercise caution.



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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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