Should I sell to private equity or a trade buyer?

The choice depends on which buyer's test the business already passes, because private equity funds and trade buyers pay for different things. A trade buyer pays for what it can add to its own business. A private equity fund pays for a plan it can finance, grow and sell on.

What does a trade buyer pay for?

A trade buyer buys to keep the business and combine it with its own. It pays for customers, products, sites and the costs it can take out. It checks customer and product overlap, and how far the business depends on its current owners.

• The business on its own. A careful buyer asks whether it would own the business if every synergy failed.
• Synergies any buyer could get. A disciplined buyer pays the seller only for those. It keeps the ones only it can create.
• Value that survives the deal. People, customers and consents that stay after a change of owner.

A competitor is a trade buyer with one difference. It knows the market already, so it tests the numbers harder and the story less.

What does a private equity fund pay for?

A fund owns a business for a few years and then sells it. It needs the earnings to grow and the next buyer to believe it. The fund check asks whether earnings can double in five years.

• A plan it can finance. Recurring revenue, cash generation and growth levers it can back with capital.
• A team that stays. Named managers who own each lever and can pull it without the seller.
• Earnings that carry debt. Interest, rent and other fixed charges paid even in a year as bad as any on record.
• A next buyer. Someone who would pay for a bigger version of the business, with a reason.

How does a seller choose?

A seller decides which two or three buyer types matter, then writes what each would pay for. The seller check describes the result in one sentence: "Named buyer types with what each values and fears, and two or three specific, evidenced themes every shareholder repeats."

One weakness fails both tests. A business that runs through its owner worries a trade buyer, who checks dependence on the owners. It also fails a fund, which needs a team that stays.

The next step

Take the seller check, and see each buyer's questions in the PE fund check and the corporate buyer check. No email before your result. No sales call after it. No list. Delete on request.

Related questions

• What multiple will my business sell for?
• What is exit readiness?
• Why do private equity deals fail?

This page is drawn from the seller, PE fund and corporate buyer checks' grids and the exit readiness article on onestepright.