What it means
In a trade sale, the buyer is called a trade buyer or strategic buyer because it wants the business for what it can add to its own operations. This could be new customers, technology, a product range, a geographic presence or cost savings from combining the two firms.
The buyer is not simply seeking a financial return, as a private equity fund would. Because trade buyers expect synergies (extra value created by combining the businesses), they are often able to pay more than a purely financial buyer.
This is why founders and investors frequently prefer a trade sale when the right buyer exists. The price is usually based on a multiple of earnings or revenue, then adjusted for debt and cash.
The process normally starts with preparing the business for sale, followed by finding interested buyers, sharing information under a confidentiality agreement, and negotiating a price. The buyer then carries out due diligence, which is a detailed check of the finances, contracts and legal position.
Completion follows when the final agreement is signed and the money is paid. Sellers must think about more than the headline price.
Terms such as how much is paid on day one, how much is deferred or tied to future performance, and what warranties the seller gives all affect the real value. Taxes and transaction fees also reduce the cash that owners actually receive.
There are risks, particularly around confidentiality. Sharing sensitive information with a competitor can cause harm if the deal collapses, so sellers limit disclosure in stages.
Employees, customers and suppliers may also worry about a change of ownership. A trade sale differs from a flotation, where shares are sold to the public, and from a sale to a financial buyer such as a private equity firm.
Each route has different price, speed and control outcomes.
In practice
Real-world examples
Example 1
A founder of a regional software company sells the business to a larger software group that wants her customer base. The buyer pays a premium because it can sell its other products to the same clients. The founder stays on for a year to help with the handover.
Example 2
A family-owned food manufacturer receives an offer from a national competitor. The family accepts a combination of cash on completion and a smaller amount payable after two years if sales targets are met.
Example 3
A venture-backed medical technology company is acquired by a global device maker. The investors receive their return in cash, and the buyer gains a product line that would have taken years to develop. Employees receive retention bonuses to stay with the new owner through the integration.
Think of it
Selling your startup as a trade sale is like a talented local football player being bought by a major Premier League club. Instead of trying to grow on your own, you join a massive organisation with infinite resources to scale your talent.
Formula
Calculation
Enterprise value = EBITDA x Valuation multiple
Net proceeds to owners = Enterprise value - Net debt - Transaction fees
A company earns EBITDA (earnings before interest, tax, depreciation and amortisation) of $3,000,000 and a trade buyer agrees a multiple of 6. Enterprise value = 3,000,000 x 6 = $18,000,000. The company has debt of $4,000,000 and cash of $1,000,000, so net debt = 4,000,000 - 1,000,000 = $3,000,000. Fees are 2% of enterprise value, which is 18,000,000 x 0.02 = $360,000. Net proceeds = 18,000,000 - 3,000,000 - 360,000 = $14,640,000, and a founder owning 60% receives 14,640,000 x 0.60 = $8,784,000.Case study
Seen in the real world
Brightmoor Packaging is an illustrative, fictional business with $3,000,000 of annual EBITDA. A private equity firm offered a multiple of 5, while a competitor offered 6.5 because it could remove duplicated costs after the merger.
The owners weighed the price against the risks. The competitor's offer was worth $19,500,000 against $15,000,000, but required a longer due diligence process and a small deferred payment.
The owners chose the trade sale and negotiated a protective confidentiality agreement and a clear payment schedule. In this illustrative story, the extra $4,500,000 headline value more than covered the added legal costs and the delay. The owners also asked their adviser to confirm how the deferred payment would be secured, because a promise to pay later is only worth as much as the buyer's ability to honour it.
Watch out
Common mistakes
- Comparing offers on headline price alone, when deferred payments, warranties and fees change the real value.
- Sharing sensitive information with a competitor before a confidentiality agreement is in place.
- Starting the process without preparing clean accounts, which weakens the price during due diligence.
Questions
People also ask
Why do trade buyers often pay more than financial buyers?
They expect synergies such as cost savings and cross-selling, which allow them to justify a higher price.
What is the difference between a trade sale and an IPO?
A trade sale transfers the business to another company, whereas an IPO sells shares to the public and the owners usually keep some control.
How long does a trade sale take?
It varies, but preparation, negotiation and due diligence together often take several months.