When business owners decide to step down, one of the most common succession options is to sell the business to a third party. A trade sale, where a business is sold to an external buyer such as a competitor or corporate purchaser, can offer numerous advantages, but it is not something to be entered into blindly without fully understanding the consequences.
Here, we take an in-depth look at this exit strategy and explore the key benefits and potential drawbacks of pursuing a third-party sale.
What Is A Trade Sale?
A trade sale involves selling the business to an external buyer, which could be a competitor or a company in a related industry. The buyer may be an individual, a corporate purchaser, or an investment firm with significant resources. In many cases, the business will be sold for a lump sum, but in some situations, the deal may include performance-based payments that come after the sale.
Trade sales are an attractive option for many business owners due to their potential for a quick exit, financial return, and continuity of the business under new ownership.
Advantages And Disadvantages Of Trade Sales
A trade sale can be a lucrative exit strategy for business owners. However, the process is complex and can come with risks. Careful planning and understanding the full scope of the trade sale process are essential to ensure that the transition is smooth and that the business is positioned for success under new ownership.
There are several core pros and cons to consider when deciding upon a trade sale exit, including;
Positives:
Higher sale price: One of the most significant advantages of a trade sale is the potential for a higher sale price. A competitive bidding process can push the price upward, with multiple buyers offering competitive offers. Additionally, a buyer may be willing to pay more if they believe they can increase the business's profitability after acquisition.
Accelerated payment: In many trade sales, particularly those involving private equity-backed buyers, the business owner can receive a large portion of the sale price upfront. This is referred to as 'accelerated consideration.' The buyer often has the capital to pay for the business quickly, making it an attractive option for owners looking for a fast exit.
Shorter handover period: Unlike some other exit strategies, trade sales can often be completed with a shorter handover period. This means the business owner can exit more quickly, although they may remain involved for a brief period during the transition. The specifics of the handover, including the owner's role during this period, will be outlined in the sales agreement.
Tax: Another advantage of trade sales is the potential tax benefits. Capital gains tax (currently 24%) applies to the sale of assets or shares in the business, which is often lower than income tax or taxes on dividend income. There is also the possibility of claiming Business Asset Disposal relief which means only 10% tax is paid on the first £1million of gain. This tax advantage makes trade sales an appealing option for owners looking to maximise their financial return.
Negatives:
Due diligence process: One of the most time-consuming aspects of a trade sale is the due diligence process. Third-party buyers will thoroughly review all aspects of the business, including financials, operations, intellectual property, and employee records. This can create a complex and disruptive process that puts the business's confidentiality at risk. While non-disclosure agreements (NDAs) can protect sensitive information, there is always a possibility that some details could leak.
Risk of distraction: The due diligence process, as well as the negotiations leading up to the sale, can be highly distracting for the business owner and management team. This can lead to operational disruptions if not properly managed, affecting the business’s day-to-day performance.
Deferred consideration: In some cases, part of the sale price may be paid out over time based on the future performance of the business. This is referred to as deferred consideration. While it can be financially advantageous, it introduces the risk that the seller will not have control over the company’s future performance and may not receive the full amount if the business doesn't perform as expected.
In conclusion, whilst a third-party sale can be a highly effective exit strategy for business owners, it is crucial that they be fully aware of the complexities and risks involved.
To ensure a smooth transition and maximise the benefits of a trade sale, careful planning, clear communication, and expert advice are essential. By weighing the pros and cons and understanding the full scope of the process, business owners can make informed decisions that align with their long-term goals and the future success of their business.
About the Author - Should you require assistance or support in any aspect of structural, governance or succession planning for your family business, the team at Buckles can offer impartial, experienced guidance on all aspects of ownership transferal. Contact them via their website to discuss the options available.
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