How to get acquired by a competitor

June 25, 2022

Selling your business has become a more and more prominent option, especially in the world of internet startups. 

The most common approach would appear to many as simply selling the business to a competitor. 

But does that mean spilling your company’s secret sauce to your direct adversary before they even make a decision whether or not to buy you out?

A lot can go wrong. Entertaining an acquisition by a competitor is a high risk, high reward scenario. 

Why would a competitor buy your business?

That is the key question you need to convince your acquirer and competitor of. 

Most of these acquisitions happen for one of two reasons: market share and synergies.

Acquiring market share is a pretty obvious reason. If your competitor wants to capture a bigger piece of the pie but growing organically takes too much time or resources, buying a competitor is a quick path to get there.

Synergies might be a bit less intuitive. Think of it more in terms of saving costs or creating more revenue.

Both you and your competitor likely run your companies fairly similarly. You both have an accountant. You both rent an office. You both pay way too much for SEO tools.

Merging the two businesses means those two cost factors can be cut down to one. Money saved.

On the other hand, revenue can be expanded. If you have a big audience that loves your product, your competitor could upsell their products to that audience and your product to theirs. Money made.

Sounds like acquiring a competitor can be a pretty good deal. But what about you?

Why does it make sense to get bought out by a competitor?

They pay higher prices.

That is not the only answer, but it is the most important one.

Other types of acquirers, for example private equity funds and searchers, think mostly in terms of “How cheaply can I buy this business to maximize ROI?”. Hence, they will try to push your acquisition price down as much as possible.

Competitors are considered strategic buyers. They think less in terms of price and more along the lines of “How will this help my company take over the market?”.

All in all, they are less price-sensitive.

million dollar payout

How to prepare your business for an acquisition

Before you enter into any talks with a competitor, make sure your business is ready for it.

First of all, see that all of your metrics are where they should be. Obviously, if you are close to profitability, wait a little bit until you get there.

Whatever your key performance indicators are, be it your customer acquisition cost, churn or DBNER, spend some time optimizing them so your business looks as appealing for an acquisition as possible. 

Secondly, create a P&L if you don’t have one yet.

A profit and loss statement refers to a financial statement that summarizes the revenues, costs, and expenses of your business.

Most likely, your competitor will ask for this document immediately to get a better understanding of the business.

Lastly, have a valuation in mind. Having a realistic valuation ready sets a good base for a negotiation with a competitive acquirer.

First contact

Either party can make the first step. If your competitor reaches out first, they will likely ask if you are open to a “partnership”. This is usually code for “let’s get to know each other a bit more and maybe discuss an acquisition”. 

Your competitor reaching out first gives you more leverage, but may also leave you wondering if the offer is real.

It is not an issue to approach your competitor to suggest a purchase offer. It is a worse negotiating position, but you should also not wait for them to make the first move if you are keen on exiting.

Giving out the secret sauce to a direct competitor

Now to the juicy bit. During any acquisition process, your competitor will want to go through due diligence and make sure your company is what you say it is. Nobody wants to buy a cat in a bag.

But that means your direct competitor, maybe a mortal enemy in the marketplace, will learn your business’ every secret.

If a deal falls through, you are left in a very vulnerable position. And once your secret sauce is shared, there is no going back.

The first step you should take in order to assess if your competitor is solely fainting interested to get an insight into your operations is to take a look at their track record.

Have they bought a competitor before? Good sign. 

Do they have someone in charge of corporate development, i.e. M&A? Good sign. 

If your competitor does not have a corporate development employee, that might also be due to the size of their company.

But if they send someone from operations to lead the acquisition and not the CEO or founder, that is a big red flag. It likely means someone is trying to get pointers on how to better run their company.

Protect yourself

There are a few things you can do to ensure you are not being taken for a ride.

First of all, before any of the secret sauce is shared, get the deal details sorted. In many transactions, due diligence (secrets get revealed) happens before the final terms of the deal get figured out. 

That is not ideal in your case, because you and your competitor could disagree on the final purchase contract and the deal falls through. To nobody’s fault. But now your competitor is a lot wiser.

For example, figure out if you will have to become your competitor’s employee beforehand.

This is of course in addition to all of the other paperwork you sign with the acquirer before, for example an LOI.

Getting alignment on a contact draft ahead of the due diligence also shows that your competitor is serious about the transaction. 

Secondly, ask for a breakup fee. This means that if your competitor backs out of the deal after you shared information, they owe you a pretty penny. 

This, again, makes sure the acquirer is serious about the purchase.

Lastly, set a deadline. Nobody wants to be strung along. Tell your competitor the due diligence period has a window of 60 days, no more.

Two months should in most cases be enough for your competitor to understand and vet your business. Given that they operate in the same space, understanding your metrics should be a breeze. 

Make your competitor compete

As a last point, ensure to not make your competitor the only option for an acquisition. 

If everything goes well and your competitor actually presents you with an offer, you want something to compare it to.

That means float your business to other potential acquirers and collect some competing offers. One of them might be higher than what you are being offered by your competitor. 

Either way, this approach increases your odds of a successful acquisition and grants you leverage in a price negotiation.

To get offers from micro private equity funds, family offices, acquisition entrepreneurs and many more, check out our acquisition marketplace BitsForDigits. It’s completely free for business owners.

Further resources: The best resources to prepare you for an acquisition, Profit and Loss Statement (P&L)

About the author
Jan-Philipp Peters

Jan-Philipp is the co-founder of BitsForDigits. He has extensive experience in the world of startups, tech and finance. Before building a Micro Private Equity marketplace, he worked for Google and Facebook.

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