Written by Robert Johnson, Partner.
The decision to sell your business and who to sell it to can often be a tough one to make. You need to carefully consider all your options and reflect on several factors including:
- Your personal and professional aspirations
- Whether you’re seeking a ‘clean’ exit with no ongoing involvement
- The time horizon which you are comfortable optimising your returns over
In this blog, I discuss three different types of buyers that you could sell your business to and highlight the strengths of each given the factors outlined above.
Strategic buyer trade sale
Strategic buyers normally look to acquire a business that can complement or support their current operations. They are typically bigger corporates based in the UK or overseas.
Strategic buyers are likely to be operating within the same or complementary industry as your business. They will know the sector and the opportunities within it and clearly understand the benefits of acquiring your business. These types of businesses are less likely to require you to continue to run the business long-term, giving you the option to exit the business quickly and have a ‘clean break’ from the business.
Their reason for an acquisition will be to access critical components of your business such as your customer base, manufacturing capabilities, your team, or your Intellectual Property. Fundamentally they will want to generate synergies – which are typically about cost savings or revenue growth.
Benefits of strategic buyers
- These types of buyers are generally prepared to pay a higher multiple for a business – they will be including some element of the synergies highlighted above
- Strategic buyers will often give you the ability to exit your business more quickly. This will be via handover period that might last between 3 and 12 months. There may be a financial incentive for you to complete this period successfully.
- If you retain a stake in the business, perhaps with an option to sell it to the acquirer after a period, you could benefit from better returns as they are likely to improve the business through the synergies outlined above. You do of course need to remember that there will be only one buyer for your retained stake and therefore agreeing the right valuation mechanism on day one is crucial.
PE backed trade sale
A PE backed trade sale is similar to that of a strategic buyer, but the buyer will be backed by private equity funding. These types of acquirers will have a similar rationale to a strategic buyer and will be looking for synergies and growth opportunities.
PE backed acquirers are becoming much more prevalent in the market and we have completed a number of sales for clients being purchased by these types of companies as well as advising a number of serial acquirors.
Things to consider when selling to a buyer with PE backing are:
- They may be looking for fast value creation from the acquisition.
- They will be making other acquisitions or going through other transaction liquidity events in the future.
Benefits of a PE backed trade sale
- PE backed trade buyers are proven acquirers, with well-defined processes to manage the deal. This means the deal can be quicker and easier to complete.
- They bring with them credibility.
- You may have the ability to retain shares and there will be good opportunity to realise further value as the acquirer will itself be going through a liquidity event in relatively short order.
Sale to a Private Equity Fund
If you’ve founded and grown your business and have the right leadership team in place to continue to run the business, then a sale to a private equity fund may be right for you. A private equity investor is not going to take over and run your business, so this type of deal is only really suitable if you have the right management team in place and a clearly defined growth plan.
It is often the case that a private equity fund will insist that you continue to be part of the leadership team of the business for up to 3-5 years and retain a stake. It may also be that your involvement reduces over that time and that you work with the Fund to recruit your long-term successor.
Benefits of a Private Equity Fund acquisition
- You are more likely to be able to continue to retain some control and a stake in your business.
- After realising some immediate value, allowing you to de-risk your exposure to what is likely to be your main asset, you will have the opportunity to realise more value on the subsequent deal or deals, for example, when an onward sale occurs in 3-5 years’ time.
- A PE fund backer will provide funding for growth plans and future acquisitions, along with additional skills such as corporate discipline, strategic rigour, and a wider pool of knowledge around the board table, helping you to accelerate your growth plans.
The acquisition market remains buoyant, and we are seeing more ‘staged’ deals, where business founders retain a share in the business for a period of time. In the current climate, with uncertainty this type of partial deal can be more attractive for both the acquirer and the seller. It also provides more opportunity for you to benefit from an uplift in value following the deal or subsequent transactions.
Regardless of which type of deal is best suited to you, there is a sophistication needed to negotiate the right deal in all respects. It’s crucial that you get professional advice from a financial, commercial and legal perspective.
Springboard Corporate Finance can support you throughout the sales process and advise you on the best routes for you to consider. Contact us for help and advice on the best option for you to sell your business.