Trade sale vs private equity: Which path is right for your business?

Many owners achieve a position where they wish to realise the value held within their business. Several options can be considered and two options are known to deliver great value are a sale to another company or a sale to an investor such as a Private Equity firm. Below we outline the key aspects of each approach.

WHAT IS A TRADE SALE?

A trade sale refers to the selling of a business or company to another company within the same industry or a related sector. In this type of transaction, the acquiring company typically seeks to enhance its operations, expand its market presence, or achieve synergies by integrating the acquired business with its existing operations.

Cost savings driving value

The collaboration of the buyer and the vendor might bring cost savings, increased efficiency, or expanded market reach.

Market Expansion

The acquisition often provides access to new markets, products or customer bases that complement the existing operations. This can drive the value for the vendor.

Higher Value Offers

The buyer may be willing to pay a premium for your business if the acquirer benefits significantly and if your assets and capabilities are of strategic importance.

Faster and smoother transaction process

Trade buyers are normally familiar with the industry leading to a more streamlined due diligence process and swifter negotiations given their understanding of the market dynamics and potential risks.

Cash consideration

Trade sales often involve a significant upfront cash payment, providing immediate liquidity to the seller. Many trade buyers also look at an earn-out structure where the seller receives future consideration based on the future financial performance of the business.

Disclosure of information

The sale to a competitor will involve the disclosure of proprietary/ confidential information to the buyer as part of the diligence process. This is something that the seller has to be comfortable with.

Loss of independence and control

Most likely your business will be integrated into the buyer’s existing operations resulting in a loss of brand identity and culture.

Staffing changes

The buyer may implement changes to management and employee roles and maybe even reduce staff or consolidate operations resulting in job losses.

Customer and supplier relationships

The change in ownership may disrupt established relationships, trading partners may not be willing to trade with the new owner.

What is a PRIVATE EQUITY SALE?

This involves selling to a Private Equity (PE) firm, an investment management company that accumulates funds from investors and high-net-worth individuals to acquire ownership stakes in companies. The goal is to improve operations and increase financial performance to eventually sell at a profit. Many Private Equity investments involve the acquisition of multiple companies in the same sector to create a critical mass that ultimately is more attractive to other buyers on a subsequent sale.

Capital Injection

PE firms provide substantial capital that can be used for expansion, product development or further acquisitions.

Expertise and resources

PE firms often contribute experience in optimising operations, improving profitability and driving growth and usually have a broad network of connections to help the business realise its full potential and enhance the value when it comes to future sales.

Flexible exit options

PE firms typically have a defined timeframe of when they want to realise their investment allowing shareholders to plan effectively but also explore various options such as selling to another buyer or merging with another company.

Loss of control

Selling to a PE often requires you to give up a significant portion of the decision-making. Approval may be required by the PE firm on any strategic business decisions and some of these decisions may conflict between your vision and the vision of the investors.

Short term investment

The timeframe defined by the PE can create pressure on the management team to perform and deliver the expected growth and profitability.

Conflicting vision

Your vision for exiting your business and the strategy of the PE firm may not align.

Operational changes

The PE firm may decide to restructure, change leadership or introduce new practices. This may not come without difficulties such as redundancies or changing relationships with clients and suppliers.

SUMMARY

A trade sale can be a highly advantageous exit strategy for business owners, offering the potential for higher valuations, quicker transactions, and strategic benefits for both parties. However, a Private Equity Firm will be looking to grow the business whether through further acquisitions or can unlock rapid growth, necessary capital and a profitable exit.

As a team, the Pierce Corporate Finance team would discuss the benefit of taking a dual approach through the disposal process, targeting both Private Equity and Trade buyers. In this way, we drive significant value through the transaction for the seller's benefit.

The sale of a business is fundamental to the seller and generally represents the main element of an individual’s wealth. The Pierce Corporate Finance team has extensive experience across multiple sectors in successfully delivering value to individuals selling their businesses. The team can provide an honest, pragmatic and commercial assessment of your business so you can make the right decision.