If you're a business owner, you may have asked yourself: should I sell to a competitor? The answer is that it depends. Selling a business is never simple or easy. When you try to sell to a competitor then this adds an additional layer of complexity to the transaction.
Looking to sell your business to a competitor? Nash Advisory can offer you unmatched advice, and help you navigate the process for the best outcome.
Most logical trade buyers are competitors, and there are a few reasons they may be interested in acquiring you:
- They have a desire to consolidate their market position in the industry, especially if the industry is a low growth sector
- There are normally synergies that a competitor can realise which can enhance their profit margins
- A competitor will understand your business better than outside buyers making the acquisition less risky
- A competitor may want access to your products, services, employees and knowledge
We have outlined below a few considerations before you decide to sell to a competitor.
Confidentiality and protecting trade secrets
If both companies are fierce rivals, then there will be trade secrets and intellectual property which you may not want your competitor knowing about. On the flip side, your competitor would love to possess those trade secrets and acquiring your company is a great way to access them.
In a previous article, we spoke about how to protect confidential information from being provided to a competitor during the sale process.
Managing the flow of confidential information is a crucial consideration when selling to a competitor and that is why it is important to appoint a reputable advisor to assist in these situations.
ACCC or FIRB Approval
Depending upon the size of the market which you and your competitor both operate, an acquisition or merger with a competitor could potentially raise issues with the Australian Competition Consumer Commission (ACCC). The ACCC will be focused on assessing the market power of the merged group and how it may impact overall competition in the market.
Generally speaking, the ACCC will focus on any transaction where the market share of the combined group increases above 20% or where the transaction creates a “conglomerate effect” where the company could have the ability to distort market pricing, services, or harm other competitors through various corporate actions.
An example of this would be if realestate.com.au was to buy Domain. If that was to occur, then essentially the 2 largest online real estate advertising firms would have close to 90% of the market where they could dramatically increase pricing with no viable alternative available. It is likely that such an acquisition would be blocked by the ACCC.
Similarly, with ACCC approval, if the competitor is foreign-owned, then the transaction may also require approval from the Foreign Investment Review Board (FIRB). The process for getting FIRB approval can take anywhere from 30 days to 6 months. Nash Advisory can provide advice on how to consider the impact of FIRB or ACCC on a particular transaction and whether it is relevant for your business sale.
One of the main drivers for a company to acquire a competitor is because of the synergies that can be obtained by combining the two companies. These synergies normally include:
- Costs savings from lease agreements by combining office or warehouse space into one location
- Procurement costs through the ability to order more product from certain suppliers to get large bulk discounts
- Advertising and marketing with a combined group spend
- Cost savings from retrenchment of duplicated staff positions
A company that buys a competitor is likely to reduce staff levels wherever there is duplication. This tends to result in the retrenchment of the target company staff rather than acquirer’s staff. When considering a sale to a competitor, it is likely that some of the staff in your company will be retrenched after the sale process has completed, which is typically some of the administrative, finance, or IT teams. Which employees the company decides to retrench will largely be based on how critical they are to ongoing operations of the business and whether they can perform other roles in the new combined entity.
Most company owners know that staff are critical to the ongoing success of a business. If it is important for you to ensure that your staff are to remain employed after the sale of the company, then selling to a competitor may not be the right course of action.
Are they genuine?
Selling to a competitor requires conviction on both sides in order for it to complete.
- The buyer must have the conviction that the combined entities will enhance revenue and profit levels.
- The seller must have the conviction that the buyer is genuine and will follow through to complete the deal.
The challenge for both parties is that there is always a level of distrust when selling to or buying a competitor. From the buyer's side, they will be concerned that when they buy the company key employees might leave, the success of the business is tied too much on the owner and that certain synergies and cost savings may not ever be realised.
On the seller's side, the major concern is that trade secrets are provided to the buyer and the buyer subsequently pulls out. Essentially, the buyer is conducting due diligence to kick the tires to try and extract information rather than actually wanting to acquire the company. When selling to a competitor you must be sure that the buyer has:
- The desire to complete the deal – willing to spend money on lawyers, accountants, and mergers and acquisitions advisors to complete the deal
- Has the money to purchase your company – does not need to do an equity raise to complete the deal, which can add time and risk
- Has a history of completing deals successfully
- Has a strong reputation in the market for being well run and efficient
Regardless of whether you are willing to sell to private equity or to a competitor, Nash Advisory always recommends running a thorough, competitive sale process. Not only will it ensure that you are getting the highest possible price for the business, but you also enhance the chances of a successful outcome being achieved.
When negotiating with only one party, the balance of power can shift onto the buyer. This normally occurs when a transaction unnecessarily drags out and the seller gets so-called ‘deal fatigue’. In this situation, the seller may agree to certain demands of the buyer simply because they are sick of the process and just want to get the deal done. In order to avoid this, running a tight competitive process with experienced M&A advisors is critical.