Depending on the company’s profile, trading outlook, management structure and growth potential, shareholders who are considering their exit strategy may have more than one type of buyer for consideration to approach, in order to ensure they maximize the value they receive.
Types of Buyers
A sale to an already competing trade party is the most obvious, and typically could also generate the greatest financial return, but it also carries the highest risk of a confidentiality breach. Competitor businesses who already operate in similar lines and markets can be incentivized to acquire by enhancing their existing business model, crystallizing synergy savings, improving buying power and enhancing market share—all of which will result in an improved financial return to their shareholders. This type of buyer is often also classified as defensive, as part of the negotiation process with them is to raise awareness of the potential risk to their future trading outlook and market share should your business be acquired by a new entrant or other market player who has access to far greater resources than you currently possess. This ‘threat’ alone can ensure that a competitor is motivated to acquire and pay a premium price, but managing this type of buyer during a process is an art—bring them in too early, and the risk that they will either ‘data mine’ or leak information to staff/suppliers/customers of your intention to sell can severely damage value.
The next type of buyer, at a much lower risk profile, is a trade party that operates in a different market, albeit one with synergies or obvious complements to that within which you operate. This type of buyer, referred to as a synergistic buyer, may not be obviously aware of the synergies between your businesses (which can often be servicing the same customer base with different products or services), and therefore the tactic is to make them aware of the trading benefits of merging, highlighting both enhanced wallet share of existing customers (and therefore reinforcing the reliance and reducing risk of client attrition) as well as new customers which would be opened to both companies through the prospective merger. As it is often the case that this type of buyer will not have identified your company or market as an acquisition target within its existing strategic plan, it can take significantly longer to convince their board of the full value of the opportunity and subsequently conclude a deal, and also to ensure that their valuation of your business matches shareholder expectations. However, this is a crucial negotiation at the relevant stage.
The third type of trade buyer is an international entity. This type of buyer will be operating within exactly the same markets as your company, providing similar products and services in other countries, but will not currently have established a significant trading presence on the ground in your area. The challenge with this type of buyer is to evidence that they need to pay a premium and acquire your company to unlock your customer base, as opposed to growing organically and establishing a new operation, or servicing from afar. Again, typically discussions with this type of buyer can take some time to mature, and it can often be in the interests of vendors to begin dialogue with potential international parties years before a mandated process in order to raise awareness and open the possibility of a preemptive off-market approach.
Financial or Private Equity
The other type of buyer is a financial buyer, or private equity firms. The primary focus of private equity is to invest in companies who have the potential for significant short- to medium-term growth, both in terms of revenue and profits, and to then sell them in the future, typically 3-5 years post investment. Private equity firms can either invest development capital in companies to help unlock growth, or convert the company into an acquisition platform to consolidate a fragmented market on a buy and build strategy.
Private equity firms typically value lower (due to not being able to benefit from synergies or cost savings) when compared to trade, but they can allow shareholder and management equity to be rolled over, offering the potential of a much higher, long-term gain based upon the future sale.
As a comparison, trade buyers will typically acquire 100% of the issued share capital of the company for cash. Private equity firms are able to offer structures with more flexibility to meet the differing needs of shareholders—cashing out shareholders who may wish to retire or exit, whilst allowing others who are keen to stay to partially cash out and leave some of their equity in the business.
Deciding whether private equity firms are the right buyer can be dependent on timing—if a company is on a growth curve, but is still too early to maximize full value from a trade sale, then private equity can help accelerate this growth in the short-term, before exiting at full value to trade much quicker than could be achieved by the shareholders and management alone. However, private equity is a further roll of the dice by the shareholders who decide to retain equity—there are no guarantees that the forecasted growth and potential upside will happen and the changes in culture, governance and structure post-investment can be difficult for some management teams to adjust to.