Selling a Business to a Competitor? Pitfalls to Avoid, Precautions to Take

There are many pitfalls to avoid and precautions to be taken when contemplating the sale of your business to a competitor.  In particular, selling a business to a competitor can have tricky antitrust implications that require much care prior to closing.

The seller must remain independent of the buyer until closing. However, some of the information that a seller shares during the time leading up to closing includes sensitive information that the seller generally would not share with a competitor. Sharing such competitively sensitive information with a competitor-buyer can constitute an antitrust violation for which the seller can face civil penalties.

Much of this information sharing occurs during the due diligence process to help the buyer value the seller’s business and determine whether it wants to buy the business. To achieve these ends, the seller may need to share pricing information, price terms, marketing strategies, customer lists, and research and development plans with the buyer. However, the seller must carefully toe the line between sharing enough information to achieve legitimate ends and the over-sharing such information, which can have catastrophic antitrust implications.

There are some practical guidelines that a seller can employ during the due diligence process to sidestep these antitrust pitfalls:

First, and before sharing any sensitive information in any transaction, the buyer and seller should enter into a nondisclosure agreement (NDA). The use of an NDA is a common initial step in the potential sale of a business. NDAs protect from disclosure the confidential information shared between the parties. Employees, executives, and other agents of the parties who will be privy to information exchanged during due diligence should sign an NDA. In the sale of a business to a competitor, the NDA should provide that shared information (1) will only be used for legitimate purposes; and (2) will not be used to compete with or otherwise harm the seller.

Second, the seller should not share more information than that which needs to be shared for legitimate reasons, such as valuing the seller’s company. To achieve this end, whenever possible, the seller should desensitize information disclosed by:

• sharing information that is less sensitive, such as historical rather than current information, especially for pricing information and costs;
• redacting certain information, including customer names;
• aggregating information, instead of sharing individual pieces of competitively sensitive information;
• using information that is publicly available; and
• sharing sensitive information only with individuals who need to know, including only granting access to particular sections of a data room to certain individuals.

Third, the seller should not share information before such information is needed.  The parties should consider whether it is necessary to share sensitive information early in due diligence, or whether it can be shared once the parties are further along in their negotiations. The seller should remember that if the deal falls through before closing, the parties will likely remain competitors.

Fourth, the parties should consider using an independent team or consultant to review competitively sensitive information provided by the seller. An independent team would include individuals who are working on the transaction but who are not involved in the part of the seller’s business that competes with the buyer’s business or which markets those lines or services. Electronic data rooms can be structured to only give access to particular information to the independent team.

In summary, depending upon the size of the business and industries involved, antitrust concerns are a legitimate concern when a transaction involves competitors.  Competitively sensitive information can vary by company, industry, and market and great care must be given when handling such information during a sale transaction between competitors.

Learn more about how to sell a business to a competitor, especially when you receive an unsolicited offer to buy your business in one of ExitPromise.com’s free webinars.

This document is intended to provide information of general interest and is not intended to offer any legal advice about specific situations or problems.  Neither the author nor Metz Lewis Brodman Must O’Keefe LLC intend to create an attorney-client relationship by offering this information, and anyone’s review of the information shall not be deemed to create such a relationship.  You should consult a lawyer if you have a legal matter requiring attention.