Private Equity vs Trade Buyers – which route right for you?

Owner managers seeking to explore their strategic options are typically faced with two very distinct exit routes: a sale to a corporate acquirer or taking on private equity (“PE”) investment.

On the simplest level, the tension between the desire to de-risk and exit in the near-term vs that of doubling down on future growth lies at the heart of which route is optimal for shareholders. However, the reality is often more nuanced.  

Both routes unquestionably have their merits. So, what are these and what should owner managers consider before determining the best route?  

Private Equity vs Trade Buyers – which route right for you?

Private Equity

A hedged position – PE investments can offer the attractive blend of a material cash-out to shareholders day-1, alongside a share of future upside driven post transaction. This is often suited to owner managers who wish to partly de-risk and improve their financial security in the near term but aren’t yet ready to curtail their involvement in the company and its future growth strategy entirely. If the growth plan is delivered as projected upon exit for the PE investor, the overall consideration received by shareholders will likely be significantly higher than a trade exit route.

Access to capital – Access to development capital can represent a step change in the ability to fund the next stage of growth, be that via investment in people, capability or international expansion. This influx of funding often enables owner managers to plan and invest on a long-term strategic basis, as opposed to making cashflow driven compromises. Debt is also likely to be utilised as part of any investment and obtaining the right equity-leverage balance is key both for obtaining optimal deal value and avoiding banking covenant related stress post deal.

Consistency of approach – Private equity tends to act decisively and has the experience and internal bandwidth to complete a transaction in a well-defined time period. Whilst each investment house adopts differing approaches, they all tend to operate within a narrower set of market norms than a trade buyer can, especially with regards to diligence and the legal documents, which are largely predictable in advance.

Operational and strategic support – The right investor should always bring more to the table than simply access to capital. Their knowledge and prior experience in areas such as international expansion, marketing strategy and their network of professionals can add significant value at a strategic level.

Flexibility – The variety of viable deal structures available via Private Equity is broad, ranging from minority investments to outright 100% acquisitions which deliver a similar proposition to a trade exit for shareholders stepping away from the company. Partial exits are the most common route however and can work particularly well in cases where shareholders wish to take their first step towards exiting the business, but still feel they have a significant contribution to make and wish to remain committed to the growth story over the next 3 – 5 years. Additionally, a PE transaction allows for the wider management team to be brought into the equity pool, which is a useful incentive to retain and attract high calibre individuals.


Private Equity vs Trade Buyers – which route right for you?

Alignment to drive a strong return – Post-investment, all parties are mutually aligned to deliver growth and achieve a strong return when a secondary transaction occurs in the future. The benefit of PE’s experience in developing and positioning businesses for a future sale can also lead to a higher EBITDA multiple being achieved upon eventual exit, compared to the multiple achieved in the initial transaction– something all shareholders are ultimately beneficiaries of. The blend of financial and strategic support investors can offer can be a crucial factor in driving additional growth and value.

Chemistry – Last but by no means least, it is essential that owner managers and the wider management team choose to work alongside a private equity team that they feel they understand and can work with, through good times and bad. Spending time with an investor ahead of concluding a transaction will be mutually beneficial and key in understanding individuals, including what drives them and what are their goals.

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.”