What is a Trade Sale of a business?

In business, a trade sale is a kind of transaction in which a business is sold to another entity. The acquirer will usually be a company that operates within a similar industry or sector to the company being acquired.

In a typical trade sale, the seller will receive payment for their shares and assets in a company. This could be in the form of a cash payment, shares, or a combination of the two. The transaction may also be partly paid for over a period of time via deferred consideration or an earnout in some circumstances.

How does a trade sale work?

Every transaction is different, as the unique circumstances involving the business, its incumbent owners, and the acquirer, will need to be factored in to ensure the right deal is made for all involved. There are, however, some key steps that a typical trade sale will follow.

1. Business Valuation

The essential first step of a trade sale process is determining the market value of the business that is up for sale. An accurate business valuation will factor in financial statements, growth, assets and liabilities, as well as market conditions.

The current value of a business is vital information - particularly in helping business owners decide if it is time to consider exit planning options. To gain a rough idea of what your business may be worth, you can try our free Business Valuation Calculator today.

2. Finding the right buyer

When a business has been valued, it is then time to find a potential buyer. This can be a complicated process if there are no immediately obvious candidates. The process may involve significantly more time than expected, which is why we recommend consulting with an expert with access to the latest tools and data to ensure you find the best possible buyer at the right time.

3. Negotiations

Once a potential buyer has been found, the next step is to negotiate the terms of the sale, including purchase price, payment terms, sale timelines and other agreement terms. This is another step where seeking qualified advice is very important, as these essential details can become quite complicated, with numerous financial and legal implications to consider.

4. Due Diligence

An important part of this process for the buyer is due diligence. This is essential to provide assurances that the business they intend to acquire is what they have been advised it is. Due diligence reports look out for undeclared legal liabilities, regulatory compliance issues and unforeseen financial issues.

The seller can make the due diligence process much smoother, with fewer risks of the deal falling down or the overall price being reduced, by ensuring their business is transaction-ready prior to any sale being explored.

5. Completing the sale

Once due diligence has been completed successfully and any issues resolved, the finalisation of the sale can take place with the transfer of shares, contracts, and other assets to the new owner. This is also the stage at which the outgoing owner will be remunerated for their shares.

There may also be a post-sale transition period where the new and outgoing owners will work together to ensure a smooth transition, including handing over day-to-day operations, training new staff, and introducing new owners to key clients, suppliers, or other relationships.

When is a trade sale most beneficial?

For a company owner/shareholder, it is essential to understand which method of sale is most beneficial for themselves personally, their business, and their employees. They may consider several different methods of sale (also known as “exit strategies”) when making this decision.

A trade sale is an attractive exit strategy for business owners who want to exit their company, perhaps as part of their retirement plans or to fund new opportunities.

For the seller

Owners looking to secure the highest possible value for their shares can benefit from the opportunity to negotiate a price that they are happy with, providing the acquirer has sufficient interest in the company. A trade sale may be the best way to maximise the amount gained through the sale of the company.

Furthermore, this method of sale can, with the right advice, enable a clean exit if the exiting owner no longer wishes to be involved in the day-to-day running of the business.

For the business

A strategic trade sale to a suitable new owner can also bring exciting new growth opportunities to the business itself, as new owners may bring in additional expertise, greater funding, improved brand equity, or wider international reach.

For the buyer

There are countless reasons why a company may acquire another company. These include the potential to increase their market share, combine operations for greater productivity, access new markets, and expand their customer base.

Things to consider when exploring a trade sale

While a trade sale is the most common method of selling a business in the UK, it may not be the optimal route for everyone.

• Depending on the plans of the new owner and whether they intend to retain all staff, an acquisition by another company can create a lot of uncertainty in staff retention.
• A trade sale to new owners, particularly competitors, may fundamentally change the business, including how it operates and presents itself. This may be less attractive to business owners looking to preserve their legacy post-exit.
• In highly regulated sectors, there may be regulatory obstacles in the way of the transaction completion. This can add complexity to the transaction and, in some cases, cause it to fail altogether.
• There is no guarantee that the business will be successfully integrated into the acquiring business. Operational, cultural, and strategic conflicts may need to be resolved after the transaction has been completed.

When to seek advice for a trade sale

It’s never too early for a business owner to plan their eventual exit, even if there are no immediate plans to sell in the near future.

Ensuring your business is transaction-ready does not just benefit the eventual sale – it also means you are applying healthy business practices throughout the entire lifespan of the business. This means greater performance and efficiency, which will ultimately drive a greater business value later on.

The Corporate Finance team at Shorts have a wealth of experience in guiding business owners through Trade Sales, both as a buyer and as a seller. Whatever stage you are at, we encourage you to contact us to discuss your business and your ambitions.