Trade sales vs management buyouts

There is no one-size-fits-all approach when it comes to finding the ideal buyer for a business. Each potential buyer has distinct characteristics that are matched to specific circumstances. The decision between a trade sale and a management buyout (MBO) is typically influenced by a combination of factors.

The case for management buyout

MBOs are often considered for three core reasons.

1. Desire of owner to reduce rather than eliminate their involvement: There are several reasons why an owner may prefer to reduce, rather than completely eliminate, their involvement in the business. For example, where a company is in a growth position and its value is likely to increase, an owner may want to release some equity to improve their immediate financial position while still keeping part of their share in that increasing value. Additionally, the management team or their financial backers may view the owner's continued involvement as a strength that reinforces the deal.
2. Strong existing and dynamic management team: A competent and dynamic management team is typically a prerequisite for an MBO. Financial backers will support a management team capable of delivering value since the lending in these circumstances is more cash-flow-based than asset-based. As such, finance providers are reliant on the business continuing to deliver consistent cash flow to service the debt, rather than depending on assets for security. In these circumstances their faith in the management team to deliver is critical.
3. Lack of desirable market buyers: Some sellers prefer not to engage with direct competitors. They might fear market risks, where the potential buyer informs the market and weakens the seller's position, or they could be concerned about releasing sensitive information that may compromise them if the deal does not proceed. These factors are particularly relevant in tight local markets.

The case for trade sale

Trade sales are attractive when an experienced and profitable business seeks to complement its existing operations with a broader product range or extended territory, thereby gaining greater market share. The following attributes make for an ideal trade buyer:

1. Importance of the acquisition: Does it "move the dial"? The acquisition must be significant enough to attract the buyer's attention but not so large that it destabilises their current business. A rule of thumb is that the acquisition should be around 10-15% of the buyer's current size.
2. Clear strategic benefit: An ideal trade sale involves obvious strategic benefits for the buyer. If the acquisition is overly complex or requires excessive push from the seller, it may not be the right fit.
3. Obvious synergies: Synergies can be achieved through rationalising business functions, cross-selling, entering new markets, and more. These synergies represent the extra value that the buyer can extract from the business, effectively reducing the multiple they are paying for it. In competitive sale situations, buyers might share some of this value by increasing the price they are willing to pay.
4. Financial capacity: Trade buyers are more likely than MBOs to execute a full cash deal. Unlike an MBO, where the finance provider or the MBO team may not be able to finance a full exit, trade buyers often prefer a clean exit for the seller.

In conclusion, the choice between a trade sale and an MBO depends on the specific circumstances and objectives of the parties involved. Each option has its merits, and thorough consideration of the unique business dynamics will help guide the decision-making process.

Crowe's dedicated corporate finance team has a wealth of experience advising clients on delivering value in business. Connect with our experienced team to discuss how we can help you make smart decisions for your business that create lasting value.