HR & Management
Selling your business: A guide to trade buyers
6 min read
08 October 2015
When should you consider selling your business to a trade buyer? What are the advantages and disadvantages?
One of the key factors in the process of selling a business is the “type” of buyer. Potential buyers can – and often are – categorised and separated in business discourse from one another as distinct and exclusive from one another.
The two primary categories of buyers are trade (or “strategic”) buyers, and institutional (or “financial”) buyers. These are not fixed or concrete categories, but they are useful reference points.
The type of buyer best suited to you will, of course, ultimately depend on your needs and goals behind the sale. Who you sell to will ultimately be determined through your own understanding of your goals, and then researching which type of buyer aligns most closely with those goals.
In this article, we discuss trade buyers – how to identify them, what they can offer you, and when selling to them is more appropriate than the alternative.
Trade (strategic) buyers
Trade buyers are perhaps the most common “type” of buyer. Simply put, a trade (or strategic) buyer looks for companies that can be synergised with their existing operations.
Most importantly, a trade buyer is looking at more than just the monetary value of the company; they are bidding because they are looking to gain something their business currently lacks.
A trade buyer is therefore engaging in a strategic acquisition. For example, if they already operate within the same industry, they may want to inherit a larger market share by integrating your assets, customers and resources with theirs. If a trade buyer works primarily in a different industry, it could be that they are looking to expand into new markets or integrate.
Typically, a strategic buyer will be planning:
- A vertical expansion – such as a customer planning backward integration or a supplier planning forward integration
- A horizontal expansion – for example, into new geographic markets or product lines
In short, the strategic buyer wants a company because it will enhance their existing operations. They are often willing to pay for readily realisable synergies, and often will pay for speculative synergies.
Evaluating trade buyers
Choosing a buyer is contingent upon your exit strategy. Trade buyers offer a number of advantages over institutional buyers depending on the circumstances, and if you’ve developed and understood your own objectives, you can judge for yourself whom to sell to.
There are a number of scenarios in which selling to a trade buyer might be more fruitful than the alternative. For example, if you want a high sale price, but are concerned about the future of your employees and your business’ legacy, you could be well suited to a trade buyer.
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Trade buyers are then obviously well-suited to entrepreneurs who have spent years building a successful business, and want to see the business succeed in the future, even if they don’t want to run it anymore.
A trade buyer is more likely to evaluate your company on a holistic basis, and are therefore also more likely to pay a premium for it. They will get more benefit from owning your business than what it will cost; it has additional, subjective and objective value to their existing operations.
Structurally, a sale to a trade buyer is going to involve far fewer parties: less advisors, less lawyers, and less complication in general. For this reason, a sale to a trade buyer is also suited to those looking to “get out quick”, with the added bonuses being a better final sale figure and a more personable negotiation.
The long-term results are that your company potentially has a bright future ahead of it, as the buyers seek to capitalise off of its strengths – rather than it being sold to make a quick turnover for a private equity firm.
The disadvantages are obvious, though. While many who have sold to trade buyers come out of the other end feeling positive about the experience, trade buyers are generally going to lack the level of organisational complexity possessed by an institutional buyer.
Fewer advisors means there’s going to be less cost and complication to you and the buyer in negotiation proceedings, but an institutional or private equity firm’s real advantage is its experience with structuring and negotiations.
Selling to a trade buyer could get you the fast sale you want, but if you don’t go through a certain level of due diligence, the integration process could be messy or protracted.
Selling to a trade buyer involves relinquishing a lot of control – they will have their own expertise and team, and will be capable of managing the business themselves. This is obviously unsuitable if your goal is to sell the company, but want to remain in a managerial role.
David Falzani is president of Sainsbury Management Fellows.