Welcome to this monthly series for business owners, where I aim to demystify the corporate market and highlight trends in a non-technical manner
The choice for those outside the corporate finance community is often shrouded in mystery. Where will I get the best price? What will each of these deals mean in practice? Many experienced private business owners don’t have previous experience of different deal types, and sometimes don’t like to ask the obvious questions (How will prices be calculated/vary? What will the impact be on my staff? What type of deal does my business suit?).
Trade sale is typically more straight-forward, with cash on completion, supported by deferred money, or earn out. However, the buyers will typically impose their own culture and management, which can be disruptive for the target business. If there are real synergies and growth opportunities, a trade deal can provide management and finance to support growth, thereby increasing the target’s value.
Private equity (PE) involves both a sale transaction, and an investment agreement; the latter regulates the relationship between the PE house and the management team after completion. PE may pay more than trade and will be attractive where the target company can grow quickly, contains ambitious/capable managers, or is capable of consolidating a sector. The quality of the management team is always decisive for PE.
PE will look to generate investment returns, typically in three to five years, whereas trade can take a longer view. PE will also introduce industry expertise and business connections beyond that available to most businesses. Typically, PE will introduce senior non-executive directors to the board, who can bring invaluable experience.
PE is also more likely to preserve the culture and leadership of a business they invest in, but at a cost, in terms of the PE investors required return on investment (generally the reason it suits a business which has the potential to grow quickly).
A large trade buyer is more focussed on the combined buyer group, rather than the individual target business. The target is able to deliver synergies and build on the purchaser’s broader operational base over time.
