Pros and Cons of Exiting Your Business with a Trade Sale - dummies

Pros and Cons of Exiting Your Business with a Trade Sale

By Helene Panzarino

When the time is right for you to exit your business, you have a number of options, including selling your business to a third-party trade buyer in a trade sale or via a business auction arrangement. You can sell either part of your business or the whole concern.

A trade sale, or selling your business to a trade buyer, usually includes the shares and assets and sometimes the liabilities. Generally, a trade sale means that you can withdraw from full time activity in the business, often after a handover period, and open the door to become a consultant to the new firm, broker bigger deals for the new firm or just step back and let the new team take it forward.

Potential trade buyers for your business fall into one of two categories:

  • The strategic buyer sees the synergy between the two businesses and often is already operating in the same industry or sector. This type of buyer recognizes the strengths and weaknesses of each business and sees a way to buy in the strengths of your business to enhance her position in the market.

    If the potential buyer has been struggling to access new or foreign markets, for example, and your business has a firm foothold in exports, a trade sale could save her time and money and provide an instant foothold in an otherwise unobtainable marketplace. Even more enticing may be the prospect of getting her hands on patents or design rights, again saving time and money, and protecting her entry into a new business area.

    Pros of selling to a strategic buyer include

    • You may get a higher price for your business.

    • You may have the option to exit your business completely, after a handover or earn-out period.

    • You may be offered a reduced but important role in the new business.

    • The sale may enhance the market position and share value of the new business, which will be of interest to you if you retain some shares..

    • Familiarity of your sector may make the process of selling quicker and easier as your potential buyer knows the characteristics and quirks of your industry. The due diligence process before the sale will go more quickly.

    • If the buyer is known to your customers and suppliers, it could make the transition to the new business less disruptive and less damaging to sales.

    On the other hand, selling your business to a strategic buyer may have some cons:

    • The business ceases to operate smoothly and efficiently during the sale process, alarming customers and staff and potentially having a negative short-term effect on trading.

    • Your senior team know that some or all of them will get the ax, and there is a potential negative impact on performance, morale and attendance, as well as the security of sensitive data.

    • Customers may not like the potential buyer and vote with their feet, moving their business elsewhere.

    • The sale may have a negative effect on company value depending on how the market sees the move.

    • If the sale doesn’t go ahead, your company information has potentially been seen and digested by a competitor.

  • The financial buyer may have deep pockets with lots of cash to spend and be looking for an acquisition that will reap financial rewards in the short-to-medium term, either by a further sale or some form of consolidation in the market. Unlike the strategic buyer, the financial buyer generally has no industry expertise and isn’t looking for a commercial blending or synergy. She’s motivated by the opportunity to acquire a business that’s undervalued in order to bolster it with financial support, fattening the golden goose for an even greater return in the not-too-distant future. Funding her purchase with a combination of equity and debt, she may see an industry that’s particularly active in creating financial gains, and both your business and the industry it sits in are attractive to her.

    Selling your business to a financial buyer brings some potential positives:

    • The buyer may be able to offer some innovative or flexible financing arrangements for the sale.

    • You’ll probably retain a key role in the new business for a significant period of time, ensuring expertise and continuity and possibly additional financial rewards linked to performance.

    • Business operating disruption is kept to a minimum, limiting impact on customers.

    • Employee morale is less negatively affected than in a sale to a strategic buyer.

    • If protecting the roles of your senior team is important to you, they are very likely to be staying on.

    • If the financial buyer has a healthy war chest, there may be future opportunities for growth by additional acquisitions.

    Cons of selling to a financial buyer include

    • You’re likely to stay involved in the business for at least a year after the sale, which may not be the best scenario for you, depending on your goals.

    • The buyer’s lack of expertise in the market means that the due diligence process will take longer and delay the actual sale.

    • Due to the higher leverage from using debt for the purchase, there’s potentially not much cash to fund growth about the place and also margins will need to be optimized at all times.

    • Financial reporting will be very detailed and happen very often.

If a strategic buyer is looking to create a powerful synergy and is sympathetic to maintaining some of the fabric and manpower in your business, you may get a better financial deal than you might with a financial buyer. It’s up to you to take a frank look at your business and identify what might be of more value to each type of buyer, and anticipate how to use your bargaining chips in any negotiations.

It’s also important to consider the impact of each type of buyer on your staff, your customers and your company legacy, as well as on your shareholders, if applicable. The highest bidder may not be the best option if your reasons for selling extend beyond financial gains, but only you can decide what matters most.

Your ultimate business and personal goals and reasons for selling, be they financial, physical, emotional or just wanting a reduced workload with some control so you can enjoy what you’ve created, help you identify the type and potential shortlist for a trade sale, but you’re not alone in what can be a very daunting process. There are plenty of corporate finance advisers who can help you, but the final decision rests with you.