Exit Planning – Trade Sale

This is the fifth newsletter in our series on planning for your exit.  This month we consider how easy it might be selling your company to a trade buyer: by that we mean another company, possibly a competitor, and not a financial buyer or your management team.

Last month’s issue was about the importance of an Exit Audit early on in the planning process.   That Exit Audit will have assessed your company’s financial performance, considered its legal affairs and whether there are any tax compliance issues to be resolved.

If you would like further information regarding selling your company and trade sales, please click here.

James Hunt and the team at Everyman Legal

Trade Sale: What you need to consider

A Trade Sale can be a great way for owners to realise significant value.  A company enjoying steep rising profits (and which is not dependent on its owners) may be very attractive to a buyer, particularly one with a strategic reason for the purchase.  For example, the prospective buyer might want access to your customer base to which it can sell its own products.  Alternatively you may have a product which the buyer needs to exploit a particular market more effectively.

A Trade Sale may also represent your only alternative if you want a premium price with money paid upfront or if you do not have a management team capable of acquiring your company.

If you choose to go down the Trade Sale route you will be well-advised to engage the services of a merger broker or corporate adviser.  Their principal task will be to find interested buyers.  The key to achieving a good price will be to have several interested buyers.  Your adviser then has the potential to play one person off against another.  A skilled adviser will ensure that the focus of negotiations is how the buyer will benefit by acquiring your company.  Also, they will not allow you to reveal your hand on the price you might be prepared to accept.

So, what are the potential risks and challenges with the Trade Sale?

Here are some of the key points to bear in mind:

If the business is overly dependent on you the owner (and a lot of companies are) then you are unlikely to achieve the price you want.

If you own your company with others there may be significant differences of opinion on whether to sell at all and if so at what price.  That may cause disputes between shareholders.

The buyer’s due diligence may reveal problems regarding your company that delay or prevent the sale (see last month’s newsletter on Exit Audits to avoid this risk).

Even if you achieve what you believe is a good “headline” deal price a significant part (perhaps 50% or more) of the price may be deferred or contingent on profits:  a so-called “earn-out”.  Alternatively the buyer may insist you take its shares as part of the consideration.  Those shares may be subject to a no-sale commitment for an extended period.  Such a deal can be very risky for you as seller.

You may be approached by buyers who have no serious intent and/or insufficient funds to complete a purchase on the terms you want.  They may be on a “fishing expedition” finding out about your company, perhaps eyeing up customers or key employees who they will approach.  These considerations make a sale to a competitor particularly risky.

The sale process may be protracted and distracting for you as the owner.

Your staff may learn that your company is up for sale.  This may be unsettling and there is a risk that key employees may leave you.

There may be material upfront costs to pay to advisers even if the sale does not go through.

The sale agreement will include onerous warranties and indemnities.  These, combined with deferred consideration or an earn-out, may leave you vulnerable to a significant reduction in the price you were expecting.

A buyer will have their own plans for your company.  This may mean redundancies.  There may be unhappy employees and the risk of customers and suppliers being disappointed with the actions taken by the buyer.

If you have chosen the trade sale route and achieved a good price you may well be happy to settle down and relax into a long retirement. But some people are not quite ready to relinquish the excitement of running the business they have built up.

If you are working in an industry you really enjoy, in a market you understand, with a great team you have built, you may wish to consider selling to your own managers.  In this way you may achieve financial security AND the fun and stimulation of being actively involved in the business you love for many more years.

A management buy out is also likely to be the only way forward if you think it will be impossible to sell your company for the right price. First, though, you will have to grow the business around a management team to whom you can sell the company. If you do not take control in good time your business will face decline and closure or else a forced sale on your death or ill-health.  There is no substitute for long term planning.

Hints and Tips

  • A trade sale may be your best plan if you are well prepared, with a strong business, and a good team that does not depend on you, the owner;
  • It is a good idea to use a merger broker or a corporate adviser to negotiate on your behalf. A good adviser will play interested buyers against one another and focus on the advantages of the acquisition to their own business;
  • Be careful about selling to a competitor who may be on a “fishing expedition” and not serious;
  • If you are not yet ready to retire, consider a management buy out instead of a trade sale.

Next month …

In next month’s newsletter we will consider how a particular kind of buy-out can be a great way for you as an owner to grow your company to a successful exit.