Trade Buyers
A clean exit – With the correct pre-emptive succession planning, shareholders are likely to be able to exit and realise their value either immediately or via a well-defined and limited transition period via an outright purchase of the company day-1.
Deal simplicity – Typically a trade exit transaction structure is simpler in nature, with the most likely commercial areas of contention centring around the application of earn-outs. The prevalence and applicability of earn-outs does vary by sector and situation but in most cases they encompass a minority of the total potential consideration and typically run for between 1-3 years.
Ability to obtain a strategic price – Whilst private equity’s pricing has been highly competitive in recent years, a strategic trade buyer is ultimately still likely to make a stronger day-1 offer for a high-quality asset. This is particularly the case where a prospective buyer can derive obvious synergies (be that from a revenue or cost perspective) which will enhance the profitability of the acquisition target for the acquirer. In addition, the increased cost of debt that has emerged in the last 12 months is in some cases stifling private equity’s ability to structure transactions in a way that allows them to out-bid trade buyers.
Clearest exit route for mature, slower growing assets – For many profitable and well-run companies the lack of future growth potential and the sector they operate within reduces or precludes the interest of private equity. Inherently strong assets remain very attractive to trade buyers, despite perhaps lacking the growth trajectory that would interest private equity.
More concentrated diligence – Although rigour in diligence is inevitable from any trade buyer, their pre-existing understanding of the activities of a target and the market it operates within can enable a more focussed approach. In many cases trade buyers have an ability to ask and deal with the important questions early on whereas a degree of early education can be required for private equity, who aren’t operating in the space daily.
Professionalism – Large corporate buyers tend to be sophisticated in nature and have the experience, capability, and deal nous to successfully complete a transaction. A degree of caution and professional scepticism should remain for companies approached by non-seasoned buyers however, where a variability in approach and lack of knowledge of market norms can increase transaction deliverability risk.
So which route is optimal?
Kaine Smith, Partner, commented “Life alongside private equity ownership isn’t perfectly suited to all, but we do often find that successful owner managers can initially have somewhat misplaced preconceptions about working alongside an investor, particularly in terms of their operational style and level of day-to-day involvement.
Our experience with private equity investors is that they are collaborative and supportive of the management team they are working with, even when performance deviates from plan or unexpected events occur."
Neil Mitchell, Partner, added “Both PE and trade sale routes can, in the right circumstances, provide the best possible strategic route for owner managers wishing to explore their options, with personal appetite for future investment of time and risk important factors.
We often advise shareholders to keep an open mind and explore both routes in tandem on a twin-track basis, learning more along the way and ultimately allowing us to advise as to which is the optimal solution.”
