Selling your business to a competitor

When you are ready to sell your business, it can be difficult to consider competitors as potential buyers, but it is often very beneficial in terms of selling the business.

According to international research, one fifth of all business sale transactions are between competitors. When you sell your company, your competitors will be among the first to knock on your door with a calculator in hand.

However, this does not mean that you should lightly enter into acquisition negotiations with a competitor. A cautious approach is recommended as there is a risk involved in giving them valuable information about your business. If the deal falls through after you disclose your margin, pricing strategy, supplier and customer details, the results can be disastrous.

There are ways you can protect your business while still treating a competitor as a buyer in a sale. Take a look at a few steps you should take to ensure your business is protected throughout the entire sale process.

Don't reveal too much

There is no need to reveal all your trade secrets to potential competitor buyers. In the early stages of a deal, it's best to keep the details of your business to yourself. Of course, it's possible to give your competitors a glimpse of how your business works, but wait until the sales process has gone much further than that to start showing them the inner workings of your company. In many cases, the main interest is the cash flow figures and general financial indicators, the disclosure of which usually poses little risk.

Make sure the interested parties sign a non-disclosure agreement early in the process. It should include any additional items that are necessary to protect your business. They also include rules against poaching employees, customers, and suppliers, as they may not be included in basic NDAs.

However, even with an NDA, it's nearly impossible to prevent competitors from using what they've learned about your business if they're not going to buy it. Keep this in mind and distribute information only as needed. Leave the disclosure of the most important details at the very last stages of the transaction — we are talking about the last few days (if possible).

Use customer motivation

The motivation of a buyer who acquires a business from a competitor can be different and depends on the specific situation. Here are some possible motives:

• Growing market share. Acquiring a business from a competitor can allow the buyer to increase its market share and strengthen its position. This can be especially attractive if the competitor's business has a strong position and a strong customer base.
• Diversification. The buyer may be interested in expanding their business portfolio and entering new industries or market segments. Acquiring a business from a competitor in a new market can provide this opportunity and reduce the risks associated with being dependent on one market or industry.
• Acquiring new customers and resources. The buyer may seek to gain access to the customers served by a competitor and use the existing customer base to expand its business. In addition, acquiring a business from a competitor may provide new resources such as technology, intellectual property, know-how or highly skilled personnel.
• Removing competition. A buyer may acquire a business from a competitor in order to reduce or completely eliminate competition in the market. This can lead to strengthening your position and increasing control over market shares and pricing policy.
• Synergies and cost savings. Acquiring a business from a competitor can result in synergies and cost savings. For example, a buyer may combine certain functions or processes, resulting in lower costs and improved efficiency.

Use the law

The laws of the Russian Federation can give you, as a seller, an excellent reason for withholding information from competing buyers. In the Russian Federation, there is no separate law called the “Law on Hiding Information from Competitors”. However, there are various regulations and laws that govern the protection of trade secrets and confidentiality of information, which may be related to hiding information from competitors. Some of them include:

• Civil Code of the Russian Federation. Articles 1465-1471 of the Civil Code of the Russian Federation regulate issues of trade secrets and confidentiality of information. They determine the legal status of a trade secret, the rights and obligations of subjects handling a trade secret, as well as responsibility for its violation.
• Federal Law "On Protection of Competition" dated 26.07.2006 N 135-FZ. This law contains provisions to prevent the use of unfair competition practices, including the wrongful receipt, use and disclosure of trade secrets.
• Antitrust laws also contain regulations designed to protect the confidentiality of information, including requirements for competitors to respect trade secrets and prohibition of illegal use of confidential information.

Knowing the laws and regulations can help protect your business when you enter into deal negotiations with competitors who may want to use this information to their advantage.

But... don't let the competition get in the way of a great deal

It's not easy to contemplate selling the expensive business you've worked so hard to build to the competitor you used to compete with. However, it would be a mistake to let your emotional reaction to selling to a competitor get in the way of a successful sale. It is inevitable that competitors will be interested in your business when you leave. Be prepared for this and you may find it pays off.

Here are some examples of large Russian companies that sold their business to competitors:

• Taif group from Tatarstan (the largest Russian holding that controls most of the chemical, petrochemical and oil and gas processing industries of the Republic of Tatarstan) bought from Sibur (Russia's largest gas processing and petrochemical company) the energy company TGK-16 JSC, which he acquired in October 2021 as part of a deal to purchase the petrochemical assets of Taif itself. The company noted that the sale of TGK-16 seems to be the most effective solution for all stakeholders in the current conditions, given that the development of the energy sector is a non-core activity for Sibur, and Taif historically familiar with "asset and landscape"; Tatarstan energy market. In "Sibur" noted that they consider the deal as a continuation of close interaction and cooperation, and count on maintaining the level of integration between TGC-16 and the company's enterprises in Tatarstan.
• In 2011, Wimm-Bill-Dann, one of Russia's largest companies in the food industry, sold its juice and beverage business to PepsiCo, a major global conglomerate in the industry. This allowed Wimm-Bill-Dann to gain access to international resources and markets, and PepsiCo expanded its presence in Russia.
• In August 2022, VK announced that it was leaving the joint venture with Sberbank, having received 100% of the Delivery Club service (a service for delivering ready-made food and groceries in Russia). A month later, a deal was closed in which VK (the former Mail.ru Group) handed over to Yandex; 100% Delivery Club, which was the main competitor of Yandex's own service; — Yandex Food. Merging with Delivery Club will allow the company to devote more resources to development and respond faster to the wishes of users, restaurants, stores and couriers.

Such cases illustrate that you can benefit from looking at competitors when selling your business. But first, conduct your own verification of a potential buyer. If you have any doubts that a competitor has good intentions, simply refuse to do business with him.

When selling your business to competitors, you need to be very careful and evaluate all the risks and opportunities. For such transactions, it is better to attract an experienced team. One of such professional teams operating in the international market, — it is Russian-Eurasian Business Broker (REAB). REAB experts will help you close a deal with an old competitor that will make you a winner.