Selling Your Business: 3 Routes to Market
By Jonny Parkinson, Managing Partner, Marktlink
The motives for selling a business can vary considerably, but the routes to market are easier to narrow down.
Essentially, there are three types of sales:
- Selling to a trade buyer
- Selling to private equity
- Management buyout or Employee Ownership Trust.
Which route to market will best suit you?
Choosing a route to market will depend on several factors, but any prospective seller needs to consider what will be best for the business and what will be best for them as the owner.
- Are you looking for a complete exit, or do you wish to continue having some involvement?
- How much time do you need to maximise your business’s sale value?
- Which buyer will pay the most or add the most value to the ongoing business?
Most crucially, are you ready, and is your business ready, for sale? You must allow for market conditions – depending on the route you choose, the time to sell could be closer than anticipated.
Let’s examine each type of business sale and the pros and cons involved in closer detail.
A trade sale
In a trade sale, you sell your company to another business typically operating in the same, or a similar, sector.
This is very much a strategic option – it’s an opportunity to maximise your day-one proceeds and, typically, a trade buyer will want 100% equity.
Frequently, this can be a more contentious option for owners. They may be reluctant to want to sell to others within their industry. However, more often than not, trade buyers also offer strategic advantages to the business, such as new routes to market, customer synergies or cross-selling opportunities.
Selling your business to trade will involve some negotiating. When you plan to give up all interest in the business post-sale, a prospective buyer may want assurances such as deferring payouts until they see evidence of financial performance matching projections.
Pros: Cash up front, reduced risk, synergistic opportunities.
Cons: Losing control of your business, uncertainty for employees and the potential for cultural or organisational clashes with the new owners.
Selling to private equity
In a private equity (PE) sale, you sell shares in your business to a private equity fund or similar financial institution. They provide capital investment in return.
With this option, you maintain some involvement in your company, the degree of which will depend on whether you opt for a majority or minority PE deal.
In a majority PE deal, the private equity house has a majority position – it owns most of the business. You work alongside your investors to drive future growth and they’ll expect you to rollover a significant proportion of your proceeds.
A minority PE deal is different because you retain the majority of the equity in your business. Your investors play a more passive role. They’ll still want some control and protection, but from your viewpoint, this is an opportunity to de-risk your business while building its value.
Opting for a PE deal gives you a longer-term perspective on selling your business and the potential of a second, lucrative, bite of the cherry. It offers excellent opportunities to grow while keeping in sight an end goal of selling outright.
Another positive aspect of a PE deal is investors’ access to undeployed capital. With so much abundant dry powder, investment houses must compete for attractive assets. It’s a seller’s market for business owners, providing they offer the right attributes.
Pros: Retain more operational control, access to capital, expertise and resources to optimise your business while reducing your risk.
Cons: Investors may have goals and incentives that diverge from your own, leading to unforeseen changes in your company.
Management buyout or Employee Ownership Trust
A management buyout (MBO) involves some, or all, of your management team acquiring a majority share of your business. However, this isn’t always as clear a distinction from a PE deal as it might appear. Frequently, management teams seek the help of private equity backers to raise the necessary funds to purchase the shares.
Usually, an MBO is structured around a financing package that relies heavily on debt funding, mainly through third-party debt from a bank or specialist lender.
Pros: Continuity within the company, more opportunities for senior management, fewer exit issues for the owner.
Cons: The buyers may need to secure additional funding, the price could be lower than a trade sale and the business may need to take on debt.
An alternative to the MBO is an employee ownership trust (EOT). Here, you sell your business to all of your employees, giving them a controlling interest. You do this by offering a minimum of 51% of your business to your employees through a trust.
A significant advantage of the EOT over an MBO is that you get full capital gains tax (CGT) relief on the sale proceeds.
Pros: Employees benefit directly from a shared ownership structure with greater certainty and less risk of disruption, plus CGT relief.
Cons: The need to ensure a capable team is in place to run the business under the new structure.
Being ready to sell
Being ready to sell isn’t necessarily the same as being willing to sell – you may need to optimise your business to get the best return. This can apply to any of the above options. Planning ahead of an exit event ensures you maximise the options available to you when you come to sell. Considering in advance which option you prefer also allows you to position the business, and yourself, to appeal best to your target audience.
At Marktlink, we provide the knowledge and insight to help clients make informed, strategic decisions to maximise their returns. Each client is different. We find the selling solution that best suits the individual profile.