Trade sale or private equity: which is right for your business?
It’s vital that you become familiar with two main types of company sale: trade sale and private equity.
Whether you’re considering a transaction as part of an exit strategy, or you aim to supercharge the growth of your business with an influx of capital, it’s vital that you become familiar with two main types of company sale: trade and private equity.
Here, we’ll delve deeper into both trade and private equity sales, weighing up the pros and cons of each…
What are the pros and cons of a trade sale?
A trade sale describes a transaction in which a company is sold to another business. Generally, but not always, both businesses operate in the same or similar industry or sector.
It can involve selling all or some of the company’s shares, or selling all or some of the company’s assets, such as stock, brand name, IP and/or premises and liabilities.
Trade sales are an attractive option to many entrepreneurs, not least because fellow businesses within your sector are often best positioned to recognise the strategic benefits of acquiring your company, so may offer a higher price to do so.
A trade sale is also regarded as “cleaner”, both in the sense that it usually allows the owner-manager to walk away more quickly (often following a handover period or earn-out), as well as allowing them to realise a greater portion of the value of the business straight away.
Owner-managers should also expect various due diligence and analysis of any business risks to be part of the sales process, with buyers requiring warranties, and sometimes indemnities, to be included as part of the deal. However, performance of due diligence is a fundamental part of both trade sale and private equity transaction processes, as we’ll see below.
Trade sales are an attractive option to many entrepreneurs, not least because fellow businesses within your sector are often best positioned to recognise the strategic benefits of acquiring your company
Trade sale advantages:
- Strategic trade buyers should always be able to pay a higher price than private equity
- Ability to walk away faster, providing a “clean break” for the entrepreneur
- Where there is synergy with the buyer, an easier transition with less disruption is possible, with potential to capture a share of cost synergies in a competitive process
- Most trade will not require the same level of diligence as private equity, so less burden on your management team and potentially less execution risk
- Revealing detailed information about the inner workings of the company, potentially to a competitor
- Reputational damage, if your clients end up disliking your buyer
- Cultural fit may not always be perfect
Private equity firms often contribute funding and expertise which help to accelerate the business’s growth, thus becoming a real source of support and backing
What are the pros and cons of a private equity sale?
When working with a private equity firm, an entrepreneur can lessen their engagement in the business and realise some of the value of the company, while still enjoying the benefits of the company’s future growth and success.
Private equity firms often contribute funding and expertise which help to accelerate the business’s growth, thus becoming a real source of support and backing as their portfolio companies scale up or work to gain a competitive advantage in a challenging marketplace.
There has to be a compelling equity growth story and backable management team to attract private equity investment. Private equity firms typically look to exit after three to five years, or longer in the case of some evergreen/patient funds. Their exit will come from a later sale to trade, another private equity firm, or via an IPO.
Since private equity firms are driven to enhance value and target a doubling of their money within this short time frame, they can sometimes be less focused on long-term growth, company culture and/or client relations. For this reason, it’s important that the right private equity firm is chosen to partner with and is as closely aligned with the seller and management as possible. Sellers should also anticipate that they may experience loss of control over the business, a lesser share of future profits (dividends) and increased reporting requirements.
- Entrepreneurs can monetize interest in the business, while retaining some ongoing ownership
- Potentially allows the owner-manager to assume a different role in the business, offering real flexibility to accommodate exiting shareholders and incentivise management going forward
- An influx of investment capital and expertise, to accelerate the company’s growth
- Given the wall of private equity money seeking a “good home”, the price can be close to a trade buyer in a competitive process
- Entrepreneurs may lose some power to steer the business as they see fit
- Increased reporting requirements, so that investors may keep track of progress
- Depending on the firm, some reduced focus on long-term sustainability, company culture and/or customer relations
How to choose the right type of sale
So how does an entrepreneur decide which type of sale will be right for their business?
Clearwater Growth’s Rob Britton, Partner explains: “Some companies lack the growth profile to be of interest to private equity firms. However, they are still great candidates for trade sale. Whichever type of company sale emerges as the most suitable for your business, it’s important to know what your motivations are for selling, and what you and your core team would like to achieve in the near and distant future. This, together with formulating a clear exit strategy, are the building blocks of a successful transaction, and will ensure your objectives remain in focus as the sale takes shape.”
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