Selling Your Business to a Competitor: A Double-Edged Sword

Prepping the sale of a company is stressful enough before bringing competitive nuances into the fray. One risky consideration when getting a deal done will always revolve around the idea of sourcing competitors as potential buyers for your business. While a source of some of the best buyers willing to pay a premium, competitors can also increase the risk of long term business sustainability. There remains a clear element of “it depends” when it comes to even considering selling-out to the competition. Below I’ll attempt to analyze the general decision, go over some of the internal and external (rhetorical and otherwise) questions to ask and finally wrap-up with some nuances we’ve seen in this process that may be helpful. In broad painted strokes, selling to the competition can be somewhat of a double-edged sword.

Why a Competitor? 

There are a number of obvious reasons a competitor may have keen interest in your business.


In general, some of the best deals go to competitors. The biggest reason: they’re typically willing to pay more for a strategic acquisition and when it comes to selling a business, money talks. Competing CEOs with big egos may also find it irresistible to stoke company growth and eliminate competition by gobbling-up a competitor. Part of our process in getting a premium for your business includes building a list of both strategic and financial buyers who may have interest in an acquisition. This list is then checked and rechecked by the seller and advisor. Discussions revolving around those on the list, who should and should not be included and an overall (sometimes sensitive) strategy for outreach is had between advisor and seller. The who, what, when, where, why and how questions are asked about the list. Any potential buyers whose inclusion pose a threat are weighed carefully. In many cases, the most threatening competition is wholly eliminated from the list at the discretion of the seller, with input from the M&A advisor.

Considerations on Go/No Go

When considering whether it’s healthy to go after potential strategic competitors, building a list and doing a simple talk-through of the various options is helpful, but asking the right questions is perhaps most important. When considering whether or not to even allow a competitor to begin knowing about your “for sale” sign in the yard, there are some pointed questions that might be helpful:

  1. What industry are you in? While you’ll of course know this question, the answer will speak volumes as to whether in matters in selling to a competitor. We’ll discuss more on this later.
  2. What is your size relative to the competition? Are you a small fish in a big pond or a big fish in a small pond. Would selling to the competition constitute a merger of equals or just another drop in the bucket?
  3. Do you own any IP that may make the acquisition a strategic no-brainer?
  4. Are there customers, contracts (including employee contracts) whose inclusion in the deal would make strategic competitors hot and heavy? Or, conversely, would giving away such information before or during due diligence be a full-fledged blunder or a form of corporate treason?
  5. Does the potential premium outweigh the risks of reaching out?
  6. What is your existing relationship with said competitors? Is the relationship one of mutual respect or unhealthy disdain? In short, would the potential buyer find more pleasure in screwing you than getting a deal done?

In some instances, the risk or working with the competition is ultra low. Your may provide the same products to a similar market segment, but perhaps there’s regional separation or product differences that make the fear of a competitor unwarranted. The buyer may be looking to horizontally or vertically integrate in which case there are great synergies perhaps in customers, but the overlap in products/services is likely to be significantly limited. If you sell commodity products, the risk can be greatly mitigated.

NDAs, Employees and Customers

In an acquisition by a competitor,  information requests can quickly get out of control when they start asking for things like details on issued patents, names of employees (esp. in services or staffing companies), and even direct contacts within customer companies. These types of risks are some of the largest. Despite the best-worded NDAs or Confidentiality Agreements, the risk of getting in bed with a nefarious snake still remains. So, once you do decide to do direct outreach, it’s typically best to continue with the questions that will unearth the reasons behind information requests prior to LOIs and due diligence.

One Extreme Example 

We had a not-too-distant client in the oil & gas sector who was so adamant that he not sell to a competitor that it slowed the deal process down by at least 9 months and almost entirely nixed the deal altogether. The worst part of the entire process was that the seller was in a complete commodity industry. In our minds, his risk of selling to a competitor was about as great as his risk of selling his product to a customer. In other words, it was extremely low. But, as part of our initial process of building, assessing and honing his potential buyer list for his company, he just laid waste to the batch of highly-strategic, highly-liquid and extremely acquisitive potential buyers because he considered them “competition.” In reality, most of what he considered “competition” also posed a problem because they didn’t currently share any of the same customers. In short, he shot himself in the foot from the outset.

In another instance, a strategic but competing buyer–acting friendly in the pre-LOI negotiations–attempted to strong-arm the seller once in no-shop due diligence in an attempt to get strategic information and significantly decrease the selling price, even far below what a financial buyer would have been willing to pay. While the transaction was eventually consummated, it came after unneeded hair loss and brain damage.

The Fine Line to the Double-Edged Sword 

Advisors and bankers walk a fine line in pitching services to potential sellers. One of the risks we run is couched in either overselling our abilities and differentiators. We’ll often inform sellers, “you’re best bet on garnering a premium will be an acquisition from ‘strategic acquirers…'” But in the same breath, there needs to be a caveat: strategic buyers are often competitors and great care needs to be exercised in the approach and negotiation phase.

The opposite extreme can also prove brash. We’ve heard competing M&A firms inform clients that they never go after a competitor when selling a business. Caution is rightly warranted, but this advice was fool-hearty and brash given the client’s business and potential for selling quickly in a highly-liquid market sector with deep regional pockets.

No two deals, owners or managers are the same. Every opportunity has a nuances that even the most experienced advisor may find challenging. Approaching the competition with your blind profile and an NDA may not be the best move for the long-term sustainability for the business. On the other hand, it may be the best decision you ever make. It depends. Determining the direction of how you deal with the competition when selling your business will require thoughtful insight and strategic pre-planning.


Nate Nead on LinkedinNate Nead on Twitter
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.
  • Quickize.com
    Posted at 17:30h, 15 May Reply

    We are in the process of rolling up a number of small local and regional companies in the Quickbooks ecosystem. How can your group fasttrack such an initiative? These are 500K to 5M per year advisors and their clients. Good financial discovery available online.

  • Barbara Findlay Schenck
    Posted at 19:55h, 15 May Reply

    Your statement “Caution is definitely warranted” is good advice when considering competitors as business-buyer prospects. In Selling Your Business For Dummies I include this paragraph: “If you feel a competitor is truly serious, treat it as a hot prospect but proceed carefully. First, be sure to obtain a mutual confidentiality agreement. Then request buyer background information before sharing further information on your business. This information exchange allows you to determine whether the competing individual or business has the capability to purchase your business and it also provides a good test of the competitor’s motivations. A competitor who’s simply fishing for information about your business won’t be interested in sharing confidential personal or business information and that alone will provide the answer to your question about how to rate the validity of the inquiry.”

    • Nate Nead
      Posted at 17:11h, 16 May Reply

      Thank you Barbara. Sage advice. If a seller does his/her own due diligence on a prospect and proceeds with caution, it is usually evident if the potential buyer has nefarious purposes by the questions asked, the documents requested, etc. Thank you Barbara. This insight is very helpful.

  • Jim hill
    Posted at 19:16h, 16 May Reply

    You obviously have to be careful as to revealing customers, vendors, margins, etc. If you run a financial buyer/strategic buyer auction you must differentiate all of those matters in the data room. Assume many competitors will be on fishing expeditions and if they don’t spend a lot on diligencing your company before even submitting an indication of interest, then bounce them out. Jim Hill

    • Nate Nead
      Posted at 04:24h, 17 May Reply

      Thanks Jim. Sometimes ill intent may not be the primary focus of strategic and financial buyers alike, but caution is still warranted. Data rooms always contain dirty laundry and proprietary secrets that must be guarded. If intent is ill, it’s often hard to spot until it’s much too late–which is the catch 22. Luckily, all such horrible examples represent the exceptions and to the rule.

      • Jim hill
        Posted at 17:20h, 17 May Reply

        caution is always warranted because your competitor, despite signing an NDA, tells you customers that you are for sale and that there will be disruption. And beyond that as I described. JIm

  • Emiliya Clark
    Posted at 19:19h, 25 May Reply

    Thank you for information. I’ve met some people that afraid to sell the business to a competitor because of giving confidential information about their business. What if competitor/buyer walks away?
    For more information about other businesses for sale: http://www.buyandsellfloridabusiness.com/ or http://sellbusinessformore.blogspot.com/

Post A Comment