Trade Sale

Trade Sale is the process of selling a company to another operating business, typically a competitor or a company in a related industry, rather than selling to financial investors or taking the company public through an initial public offering (IPO).

What is Trade Sale exactly?

‍A trade sale occurs when you sell your company to another business that intends to integrate your operations, technology, or customer base into their existing enterprise. Unlike a financial sale to private equity firms or venture capitalists, a trade sale typically involves a strategic buyer who sees synergies between your business and theirs, such as complementary products, distribution channels, or technology platforms.

‍For founders, a trade sale represents one of the most common exit strategies, particularly for businesses that have reached a certain scale but may not be suitable for an IPO. The acquiring company often pays a premium over financial valuations because they can realise cost savings or revenue enhancements that other buyers cannot achieve. This strategic value makes trade sales particularly attractive for companies with proprietary technology, strong brand recognition, or established customer relationships that would be difficult for the acquirer to build organically.

How does a Trade Sale differ from other exit strategies?

‍A trade sale differs significantly from other exit routes like an IPO or a sale to financial investors. In an IPO, your company becomes publicly traded on a stock exchange, allowing you to sell shares to the public whilst retaining some ownership. In contrast, a trade sale transfers 100% ownership to another company, giving you an immediate cash payout but removing you from day-to-day operations unless you negotiate a management role as part of the deal.

‍Compared to selling to financial investors like private equity firms, a trade sale often commands a higher valuation because strategic buyers can justify paying more based on the synergies they expect to achieve. Financial buyers typically focus on financial returns through operational improvements or future resale, whereas strategic buyers are looking for competitive advantages, market expansion, or technology integration that benefits their core business.

What are the advantages of a Trade Sale for founders?

‍The primary advantage of a trade sale is often the valuation premium you can achieve. Strategic buyers may be willing to pay significantly more than financial investors because they can extract additional value from combining operations, eliminating duplicate costs, or cross-selling products to each other's customer bases. This premium can translate into life-changing financial outcomes for founders and early employees with share option schemes.

‍Another advantage is the relative speed and certainty of completion compared to an IPO. While an IPO process can take years and depends on favourable market conditions, a trade sale can be completed in months once you find the right buyer. The transaction is also typically simpler than going public, with fewer regulatory hurdles and disclosure requirements, though it still involves comprehensive due diligence from the acquiring company.

What are the typical steps in a Trade Sale process?

‍The trade sale process typically begins with identifying potential strategic buyers who would benefit from acquiring your company. This could include competitors, companies in adjacent markets, or larger corporations looking to expand into your sector. Many founders engage investment bankers or M&A advisors at this stage to help identify suitable buyers and manage the process professionally.

‍Once potential buyers are identified, you will enter into preliminary discussions and sign non-disclosure agreements. If interest is mutual, the buyer will conduct thorough due diligence, examining your financial statements, customer contracts, intellectual property, and operational processes. This due diligence phase is critical and can uncover issues that affect the final valuation or deal structure, so having your house in order well in advance is essential.

‍The final stages involve negotiating the purchase agreement, which covers not only the price but also key terms like representations and warranties, indemnities, and any post-sale employment arrangements for key team members. Once terms are agreed, the legal documentation is completed, funds are transferred, and ownership officially changes hands.

How is valuation determined in a Trade Sale?

‍Valuation in a trade sale is typically based on a combination of financial metrics and strategic value. While financial buyers might focus on multiples of EBITDA or revenue, strategic buyers often consider how your company complements their existing business. They may value your customer relationships, technology patents, or market position more highly than standalone financial performance would suggest.

‍Common valuation methods include discounted cash flow analysis, comparable company analysis, and precedent transaction analysis. However, the final price often comes down to negotiation, with the strategic buyer calculating how much they can afford to pay based on the synergies they expect to achieve. This is why having a clear understanding of your unique value proposition and how it fits with potential acquirers is crucial during valuation discussions.

What should founders consider before pursuing a Trade Sale?

‍Before pursuing a trade sale, you should carefully consider your personal and professional goals post-exit. Many founders underestimate the emotional impact of selling a company they have built from scratch. You also need to think about your team's future—will they be retained by the acquirer, or will there be redundancies? These considerations should be addressed early in the process.

‍You should also prepare your company for sale well in advance. This means ensuring your financial statements are clean and audited, your intellectual property is properly protected, and key customer relationships are documented. Buyers will scrutinise every aspect of your business during due diligence, and any weaknesses discovered can reduce the valuation or even derail the deal entirely.

How do earn-outs work in Trade Sale agreements?

‍An earn-out is a common feature in trade sale agreements where part of the purchase price is contingent on the company achieving certain performance targets after the acquisition. This mechanism helps bridge valuation gaps when buyers and sellers have different views on future performance. For example, you might receive additional payments if revenue reaches specific milestones over the next two years.

‍While earn-outs can help secure a higher overall sale price, they come with risks. You may find yourself working for the acquiring company to hit targets while having limited control over business decisions. The terms of the earn-out should be carefully negotiated to ensure they are realistic and within your influence to achieve, with clear measurement criteria and protection against the buyer undermining your efforts.

Can a Trade Sale be combined with other exit options?

‍Yes, sometimes a trade sale is structured as part of a broader exit strategy. For example, you might sell a majority stake to a strategic buyer while retaining a minority interest, allowing you to benefit from future growth under new ownership. Alternatively, you could explore a "dual-track" process where you prepare for both a trade sale and an IPO simultaneously, pursuing whichever offers better terms when ready to exit.

‍This approach provides flexibility and can create competitive tension between different types of buyers. However, it requires significant resources to manage both processes simultaneously and may not be practical for smaller companies without dedicated M&A expertise on their team or board.