Private equity and trade sales offer two different business exit strategies for owners. Dealmakers Mike Tillson and Mike Hughes assess the case for each.
There is no one-size-fits-all approach when it comes to selling a business. Each business owner will have their own motivations: they may be retiring, looking to de-risk, or seeking external equity to super-charge their company’s growth. Whatever the driver, market conditions for both trade and private equity (PE) deals are highly favourable right now – and M&A activity is likely to remain strong for the rest of 2021 and well into 2022.
There are clear differences between a trade sale and a PE deal – the former typically delivers a clean break, the latter is more of a two-way bet involving realising some equity now but retaining a stake in the future growth. There is significant common ground in the exit process, however.
So which is the right option for you as a business owner? First, we look at the case for each option and then outline other factors that may play a part in the deal.
The case for private equity
• Founder gets to keep running the business and stay in strategic or operational control. The management team’s vision and plan is what is being backed
• PE offers vendors the ability to take some money off the table and de-risk, but also roll over a portion and benefit from the equity value growth of what they leave in the business
• A PE backer will provide capital for growth initiatives and acquisitions. They can help increase the risk appetite of the business – taking bigger bets – with someone else’s money and when you have partially de-risked
• PE firms bring sophisticated advice around the board table, including access to industry-leading talent and experience in the form of non-executive directors.
• PE can be great at facilitating a step change in the business – a sizeable acquisition or international acquisition, for example. The people involved will have typically be involved in something like that before and can help guide you on the journey
• PE is a master of selling businesses, and will help you get a great outcome down the track
The case for a trade sale
• Clean transaction – vendors often achieve the full value of the business on day one
• A buyer who has identified strategic benefits will pay a great price
• Potential enhanced profile from being part of an international or listed group
• Flexibility for the founders to stay involved if they want to (and even build a role in the enlarged group) and benefit financially (salary, shares, long-term incentive plan, etc)
• Allows the founders to start again with a new venture – assuming it doesn’t breach non-compete clauses. Many vendors like the thrill of building a business from scratch
• Many businesses do not have the growth profile to be attractive to PE but are still solid trade deals
• Significantly easier diligence process in general – less focus on short-term financials, typically no commercial diligence and less risk of a last-minute price chip
Succession planning pays
“Whatever your objectives, succession planning is a critical ingredient," says corporate finance partner,Mike Tillson. "If you have a management team that a buyer believes can deliver the business plan, whether you are trying to sell to PE or trade, this is going to make the buyer so much more comfortable. It means they'll be more willing to pay a full price.
“On the flip side, if the buyer thinks the vendor has mentally checked out and there’s no one capable of picking up the reins to lead the business, this puts a lot of risk on the deal. It can dampen interest in the business and lead to a lower valuation.”
Corporate finance directorMike Hughesagrees: “Although the solution feels different, both trade and private equity suitors will appraise the business on similar metrics.”
Exit planning over the long term
A long-term working relationship between corporate finance partners and shareholders and business owners can really help when it comes to selling a business.
“Negotiating is only one part of the dealmaking process," says Mike Hughes. "Some conversations may not bear fruit in terms of a transaction for several years. It’s about offering guidance, advice, understanding and support over the long term. Having this kind of relationship with founders is hugely important – it builds trust and understanding.”
Mike Tillson adds that, in an ideal world, succession and exit planning should occur over a few years. "Business owners should have the time to plan for what they want to do longer term. They need to surround themselves with the right management and advisers to enable them step back or step out when they’re ready.”
What attracts trade buyers?
While trade and private equity buyers are both willing to pay great prices for strongly performing businesses in attractive sectors, trade buyers may sometimes be attracted by more mature companies.
“The best trade deals, where you get an element of competition to drive up the price, will generally be above £10 million in value. Trade buyers take comfort in businesses that are a bit more developed and have that clarity of market position, good intellectual property and a strong reputation,” says Mike Hughes.
He believes a 'clean break' trade deal allowing a full exit will suit many business owners who have spent many years calling the shots.“ These individuals don’t always react that well to change. They are sometimes not even that comfortable with formal board meetings, let alone having a new structure through which they need to justify their decisions because they have always made all the calls.”
When is private equity the better exit?
Mike Tillson believes that private equity offers a great option for business owners looking to remain involved and drive continued growth with a highly-motivated financial partner. However, certain myths about PE can deter some vendors.
“The buyout mega-deals worth many billions of pounds and featuring very high debt levels, are not comparable with the £10 million to £100 million market, where we are most active.
“In the mid-market and lower mid-market, the PE funds are all about growth and job creation. They want to support a business with a top line of say £20 million to £100 million to make this three or four times as big. I believe business owners meeting PE firms can help dispel these myths.”
“A PE deal can be the best of all worlds – you get to take cash off the table and de-risk, but still get to own the business and participate in its future growth.”