Pros and Cons of selling your business as a Trade Sale

Exiting a business is one of the most significant decisions that business owners will likely make throughout their careers. There are several options available for exiting a business, each with benefits and potential drawbacks. When it comes to selling a business, planning is essential, as is a strong understanding of which method of sale is most suitable.

In this article, we will be looking at the pros and cons of a Trade Sale.

What is a Trade Sale?

A trade sale involves selling your business to another company. The buying company will often operate within the same industry or a related field. It is one of the most popular exit strategies and sees the buyer acquiring your business, including its assets, customer base, and intellectual property.

What are the pros of a trade sale?

Firstly, let’s look at the potential benefits of a Trade Sale as an exit strategy. Please note that every transaction is different, and not all of these will apply to every Trade Sale.

Greater Sales value and upfront cash

By selling your business to a strategic buyer via a Trade Sale, Sellers will often receive a considerable lump sum payment as part of the overall consideration. This lump sum can be hugely beneficial for Sellers looking to personally financially de-risk . The overall consideration offered under a Trade Sale is also often higher than that of an alternative exit route if a buyer can be identified who sees strategic value in the purchase.

Access to greater resources and expertise

When you exit your business through a Trade Sale, the acquiring company may bring a wealth of new expertise and resources with it. This can be great news for your business, which is gaining access to a larger network, established distribution channels, more advanced technologies, growth funding or industry-specific knowledge. These resources can enhance the growth potential of your business following your exit and bring enhanced opportunities and career prospects for your employees.

Reduced risk and liability

When share ownership of a business is transferred to a strategic buyer, the burden of future potential legal and financial challenges principally shifts from you to the acquiring company. This is subject to the detail in the legal documents. this can be particularly advantageous if your business is operating in a competitive market or is facing regulatory changes and an uncertain economic future.

What are the cons of a trade sale?

Conversely, a Trade Sale may not be the best exit route for everyone. It is important to recognise these potential drawbacks. If these are of concern, then an alternative exit strategy, such as a Management Buyout or EOT, may be worth considering.

Sacrificing control

Once your business is sold to a strategic trade buyer, you will no longer have the final say on big decisions. The acquiring company may implement changes that diverge from your original vision and business practices. If maintaining control, even if only temporarily, is a priority for you, a trade sale may not be the most suitable exit.

Uncertainty for staff

When a company is acquired by a strategic buyer, it may have overlapping departments, different organisational structures, or plans to reduce certain areas of the business. This can , sometimes, result in redundancies. This can be a very challenging situation, especially if you have longstanding employees whose futures may become uncertain. It's important to consider the impact on your employees and provide support for them during the transition period.

Potential cultural and organisational clashes

The acquiring company may have its own work culture, values, and management style, which could clash with the existing culture of your business. Managing these differences requires careful integration plans to ensure a smooth transition.

Negotiating on the sale price and legal provisions

The sale price of shares in a Trade Sale is subject to negotiation. This will often involve a lot of discussion on key issues and can lead to a final sales price and structure that is less desirable than first agreed. A trade sale can also involve the granting of extended warranties and indemnities. These legal provisions are to protect the buyer from historic liabilities and keep responsibility with the Sellers in certain, defined situations.

Privacy and confidentiality

The process of selling a business via a Trade Sale involves sharing sensitive financial and operational information with potential buyers. It is essential to ensure the confidentiality of this information in order to protect the value and reputation of your business. We recommend working with professional advisors to establish non-disclosure agreements, which can help safeguard your interests when going down the Trade Sale route.

What are the alternatives?

Exiting your business with a trade sale presents both advantages and disadvantages. You should carefully consider these factors and seek professional guidance to make an informed decision regarding your most suitable exit strategy.

If a Trade Sale is not the right exit for you, there are several other options available, including:

• Management Buyout: Where the existing senior management team of a company purchases the controlling stake and takes over the business.
• Management Buy-in: Where an external management team purchases the business and replaces the incumbent leadership.
• Employee Ownership Trust (EOT): Where a trust is set up by existing company owners for the benefit of all employees. This trust then becomes the majority owner of the business as a form of indirect employee ownership.
• Initial Public Offering (IPO): When a privately owned company offers its shares to the general public.

If you would like advice on what the best exit strategy for you and your business may be, we encourage you to speak to the Shorts Corporate Finance team, who have extensive experience in helping business owners find and execute the best exit plan for them.

Read more about the best business selling options in our detailed guide to exit strategies.