Cobbetts column: Selling a business – trade or private equity?
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FINDING the right buyer for a business has never been an easy decision, and the increased cautiousness of investors of all shapes and sizes in recent years has made the process an even greater challenge. The two most likely suitors for a business will be trade acquirers and private equity – both of which offer a number of considerations for the seller. Against the current financial landscape, both trade and private equity are circumspect in what businesses they will spend any serious time researching and investigating. The days of buying a business on the cheap and making a quick profit are long gone, which is potentially good news for sellers – but price is only one element of an acquisition, and there are compelling reasons for considering both options. Trade buyers are cash rich, and will often have a better insight into changes to a business’s economic environment, potential synergistic savings or market dynamics. Trade may well offer a better opportunity to realise day one cash if the current management team have no appetite to continue within the business. For this reason, trade may be an attractive option for a seller looking to exit in full on a retirement basis unless there is a clear second tier management team willing (and able) to fund an MBO, given that there is probably no requirement to continue working in the business, and only a modest handover will be expected. Private equity, on the other hand, has the ability to assess a business on a stand-alone basis and can take a dispassionate view, divorced from any historic issues, and assess fact-based values without any preconceptions or expectations. In addition, private equity is likely to want to secure management continuity and often offer sellers a full price with the added advantage of the opportunity to continue to participate in the continued growth of the business. The metrics offered by each potential acquirer are, of course, significantly different for sellers. Private equity always buys a business to grow it, offering a partial de-risking and an opportunity to go again on a secondary buyout or exit. Trade, on the other hand, may offer the same price as a private equity house for a clean break, meaning the vendor can exit straight away but without any forward-looking upside. Something common to both types of acquirer is their recognition of the scarcity of quality acquisition targets in the current market, and both will be prepared to make deal terms attractive for the right target. Trade may be able to move quickly, but private equity is sitting on significant sums of uninvested funds it has raised, and can draw on a huge pool of experience to drive foreshortened completion timeframes. As the market recovers, the appetite to buy is likely to increase significantly. Both trade and private equity will be keen to invest the money they have kept under the bed during the recession, and will be actively seeking potential acquisitions. However, every investor remains mindful of the dangers when multiples run out of control, and will balance the need to invest or expand with the absolute necessity of a sensible, cautious approach. More articles in
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