The Headline Valuation Isn’t the Whole Story

When comparing a trade sale to an EOT transaction, it’s natural to focus on the headline valuation. Trade buyers, particularly strategic acquirers, may offer a premium based on synergies, market position, or intellectual property. However, experienced advisers know that looking behind the headline figure reveals a more nuanced picture:

• Clean exit vs. contingent payments: EOT transactions typically offer a cleaner exit with fewer strings attached. Trade sales often include earn-out provisions, performance conditions, and warranties that can significantly reduce the actual consideration received.
• Tax treatment: EOT sales offer a substantial benefit with 0% Capital Gains Tax on qualifying transactions. This tax relief often compensates for what might initially appear to be a lower headline value compared to a trade sale.
• Price Erosion During Due Diligence and Negotiations: The actual sale price achieved in a trade sale can be significantly lower than the initial offer or headline figure. As negotiations progress and due diligence unfolds, buyers frequently identify reasons to reduce their initial valuation. Financial and commercial due diligence often reveals issues—from customer concentration risks to accounting adjustments—that buyers use to negotiate downward. Many sellers are surprised to find their expected consideration reduced by 10-30% by completion, creating uncertainty throughout the sale process. In contrast, EOT valuations, while typically more conservative from the outset, tend to remain more stable through to completion.
• Transaction certainty: Trade sales can fall through at the eleventh hour due to changing market conditions, financing issues, or due diligence concerns. EOT transactions typically have higher completion rates once the process is underway.

The Sale Process: Stress, Disruption and Confidentiality

The journey to completion differs substantially between these exit routes:

Trade Sale Process

• Typically involves a competitive auction or targeted approach to potential buyers
• Extensive due diligence with multiple teams examining every aspect of your business
• Significant management distraction over 6-12 months
• Confidentiality risks as information is shared with potential competitors
• Higher potential for deal fatigue and last-minute negotiation tactics

EOT Transition

• Collaborative process with a single buyer (the EOT)
• Streamlined due diligence focused on ensuring company viability
• Reduced management distraction, typically 3-6 months
• Enhanced confidentiality with fewer external parties involved
• Lower stress levels with aligned incentives between seller and buyer

Legacy Preservation and Business Continuity

For many owners, especially founders of long-established businesses, considerations beyond financial return play a crucial role:

• Brand and culture preservation: EOTs enable businesses to maintain their established brand identity and culture. Trade sales, particularly to larger corporations, often lead to rebranding, restructuring, and cultural shifts.
• Team stability: Staff retention rates tend to be higher with EOT transitions. Trade sales frequently result in redundancies or departures of key team members uncertain about the new ownership.
• Local community impact: Businesses transitioning to EOTs typically continue operations in their existing locations. Trade buyers may relocate operations or consolidate facilities.
• Long-term independence: EOTs provide a structure for ongoing independence and autonomy. Trade sales generally result in integration into the buyer’s existing operations.

Financial Structuring Considerations

The financing structures of these transactions differ in important ways:

Trade Sale Financing

• Typically paid in cash at completion, sometimes with shares in the acquiring entity
• Earn-out provisions making portions of the consideration contingent on future performance
• Warranty and indemnity provisions creating financial risk for sellers
• Potential renegotiation of terms close to completion

EOT Financing

• Often structured as vendor financing with payments over time
• Various tranches of debt, potentially including third-party financing
• Flexibility in structuring interest rates and repayment terms
• Possibility of retaining minority equity stakes alongside the EOT
• Greater flexibility to adapt to business needs and cash flow requirements

Which Option Is Right for Your Business?

There is no universal answer to whether a trade sale or EOT transition is preferable. The right choice depends on a range of factors specific to your situation:

• Financial priorities: If maximising immediate cash proceeds is the primary goal, a trade sale might be preferable. If achieving a fair value while optimising tax efficiency is key, an EOT could be more attractive.
• Legacy concerns: Business owners who value continuity, preserving company culture, and employee welfare may find EOTs align better with their exit vision.
• Timeline considerations: EOT transactions can often be completed more quickly and with greater certainty than trade sales.
• Industry dynamics: In certain sectors, strategic buyers may pay significant premiums, making trade sales financially compelling. In others, the competitive advantages of employee ownership might generate better long-term outcomes.
• Owner involvement: If you wish to remain involved in the business post-sale, EOTs generally offer more flexible arrangements compared to trade sales.

Your Decision

The decision between an EOT transition and a trade sale represents one of the most significant choices a business owner will make. Looking beyond the headline valuation to consider the total economic package, process experience, legacy preservation, and long-term business success factors provides a more complete basis for this important decision.

At Level, we work with business owners to thoroughly evaluate their options, providing clear analysis of the financial, legal, tax, and personal implications of each exit route. Our experience allows us to guide owners through this complex decision-making process, ensuring they achieve an outcome aligned with both their financial goals and values.