When business owners consider selling their company, one of the first potential purchasers that comes to mind is often a competitor.
That makes sense. A competitor understands the industry, knows the customers and may recognize opportunities to combine operations, reduce costs or expand its market presence. Those advantages can translate into an attractive purchase price.
But selling to a competitor also creates risks that owners should understand before entering serious negotiations, particularly when it comes to sharing commercially sensitive information.
Protecting Competitively Sensitive Information
A prospective purchaser will naturally want to conduct due diligence before committing to an acquisition.
That process may involve reviewing customer contracts, pricing, margins, supplier arrangements, employee compensation, business plans and other commercially sensitive information.
When the purchaser is a competitor, disclosure creates a particular concern: what happens if the transaction does not close?
The purchaser may have learned valuable information about your customers, pricing strategies, profitability or future plans. Even if the information cannot legally be used, the practical difficulty of ensuring that knowledge does not influence future competitive decisions can be significant.
There is also a competition-law dimension. Sharing competitively sensitive information between competitors can raise concerns under Canada’s Competition Act, even when the parties are exploring a legitimate acquisition.
A confidentiality and non-disclosure agreement (“NDA”) is an essential starting point, but it may not be enough.
Depending on the circumstances, additional protections after the NDA is signed may include:
Staged disclosure. Provide information progressively as the transaction advances. Detailed customer-level pricing, margins and other sensitive information may not be necessary during initial discussions and can sometimes be deferred until closing certainty improves.
Redactions and aggregated information. Customer names, individual pricing arrangements and supplier terms may be redacted or replaced with anonymized or aggregated data. For example, a buyer may initially be able to assess customer concentration and profitability without identifying every customer or reviewing individual contract pricing.
Clean teams. Particularly sensitive information can be reviewed by a designated group of external advisers or appropriately segregated individuals who are not involved in the purchaser’s day-to-day competitive decisions. The clean team can provide approved summaries or findings without disclosing the underlying information to the purchaser’s commercial personnel.
Restricted access and use. The NDA and diligence procedures should clearly address who may access sensitive information, the purposes for which it may be used, restrictions on disclosure and what happens to the information if negotiations end.
These protections should be tailored for the businesses and the information involved. The objective is not to prevent legitimate diligence, but to allow the purchaser to evaluate the opportunity without unnecessarily exposing the seller.
Consider Competition Law Early
A transaction between competitors may also attract scrutiny under Canada’s Competition Act.
The Competition Bureau can review acquisitions that may substantially lessen or prevent competition, including transactions that fall below the monetary thresholds requiring advance notification.
Most acquisitions do not raise material competition concerns. However, where the parties are significant competitors in a particular product, service or geographic market, the issue should be considered early.
Owners should understand whether regulatory review could affect the likelihood or timing of closing and ensure that the parties continue to operate independently until completion.
Be Careful About Exclusivity
A prospective purchaser may request a period during which the seller agrees not to negotiate with other buyers.
Exclusivity can be reasonable, but agreeing too early or for too long can reduce negotiating leverage and prevent discussions with other credible purchasers.
That concern becomes particularly important where the purchaser is a competitor, and the transaction involves regulatory uncertainty or extensive access to sensitive information.
Compare Offers Based on More Than Price
A competitor may ultimately be the best purchaser for your business.
But owners should consider several questions before proceeding:
- How much will be paid at closing, and does the buyer have committed financing?
- What commercially sensitive information must be disclosed, and when?
- What protections will apply if the transaction does not close?
- Could competition-law concerns delay or prevent completion?
- Are there other purchasers offering a better balance of price, risk and certainty?
Selling a business is about more than finding someone willing to pay the asking price.
It is about completing a transaction on terms that protect the value the owner has spent years building, including protecting that value throughout the sale process itself.
If you’re planning for a potential purchase or sale, connect with Pitblado Law for tailored guidance. Our team can help you evaluate your options and navigate the negotiation and transaction process. For a confidential discussion, please contact:
Partner
204.956.3572
Note: This article is of a general nature only and is not presented as a comprehensive review of the law or as being exhaustive of all possible legal rights or remedies. This article is not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice applicable to their own circumstances. We do not undertake any obligation to update this article to reflect changes in law that may occur in the future.