There is no general ‘Rule of Thumb’ when it comes to exit strategies for business owners. Every business and its encompassing considerations are unique, therefore, there will almost always be a choice of exit options for the owners. For small businesses, the two most popular exit strategies are either a Trade Sale or Private Equity Sale.

In 2022, both trade and private equity buyers were interested in the growth potential of small to medium companies (between £0.5m and £50m revenues) across various sectors. Under the same criteria, ‘Industrials’ was a busy sector last year with almost one third of acquired companies falling under this categorisation.¹

In this context, it is important for the seller to understand any buyer’s motivation and future plans for the business, otherwise it will lead to a culture clash and eventually to an integration failure. Nolan John, our Research and Insights Manager, recently wrote an article on the importance of “Cultural Fit in M&A” which can be read here.

Trade Sale

A ‘Trade Sale’ involves selling the business to another company within a similar or complementary industry either in the same operating country or increasingly from overseas.

For example, an automotive parts manufacturing company being acquired by another automotive parts manufacturing company to expand its product line and increase the customer base would be a typical ‘Trade Sale’.

There may be various motivations for the acquirer and his interest in your business. Whether it is for an increased market share, new product line, or to enter a new geography, a trade buyer may be willing to pay a premium for the business, especially if it has a strong brand, loyal customer base, or unique intellectual property.

For the sellers, a ‘Trade Sale’ typically offers an earlier exit premium to synchronise the synergies with the buyer and to add strategic value to the business.

Private Equity Sale

When referring to a ‘Private Equity Sale’, we are typically talking about a transaction that involves selling the business to some form of Financial Investor such as a Private Equity firm, ‘Family Office’ or even a group of ‘high net worth’ or institutional investors.

Private Equity firms typically invest in companies with higher growth potential and are often willing to purchase either all or part of your shareholding; enabling them to take an active role in managing the business alongside you for a period which may vary from deal to deal. They may provide capital, expertise, resources and networks to help the business grow and achieve its objectives.

Typically, a Private Equity company will have its own financial, operational and sector focused metrics against which the agreed growth plan would be measured. This does however vary widely, dependant on whether the transaction is a ‘platform acquisition’ or a ‘bolt on’ acquisition to a business or collection of businesses in which they are already investing.

In these circumstances, it is vital for the seller to understand the experience of the investors that will take over the business – and the culture and objectives of the investing company – but sellers should always bear in mind that the fundamental operating model of a Private Equity firm will be to invest in companies that they can help to grow, both operationally and financially, in such a way as to enable the collective shareholders to realise added value on exit after a period of time.

Conclusion

In summary, both Trade and Private Equity buyers can provide significant benefits to the owner and the business. A Trade Sale can provide access to new markets, resources and technologies, whilst a Private Equity Sale can provide access to all these plus the capital and expertise needed to support such growth.

However, it is important to carefully consider the options in order to select the one that is best for the business and its stakeholders.

Please see this space for more detailed view on both the types of exits in coming weeks.

As a long-established premium provider of business sale advisory services to UK businesses, EvolutionCBS offers business owners a complimentary and confidential discussion on how their specific objectives could be met and provides them with pragmatic, practical advice on how to begin preparing both themselves and their businesses for future sale or investment. 

EvolutionCBS works with owners of UK businesses in any sector, finding buyers from around the world through highly targeted research and supporting clients with dedicated Director-led teams, at every stage of their journey to a successful sale or investment. 

If you are an owner or shareholder of a business and would like a no-obligation consultation on the sale of all or part of your business, please email: info@evolutioncbs.co.uk or contact us on Tel: 0118 959 8224.

source:

S&P CapitalIQ : screening of transactions with target companies having revenues between £0.5m to £50m between 01/01/2022 to 31/12/2022.