Trade sale or secondary buyout – compared.

Both trade sales and secondary buyouts are methods by which private equity firms can exit their investments in portfolio companies. However, they involve different types of buyers and have distinct characteristics. Michael Tait compares trade sales and secondary buyouts:

Buyer Type:

Trade Sale: In a trade sale, the buyer is typically a strategic player within the industry. This can include other companies operating in the same or related sectors, looking to expand their operations, acquire new technologies, or achieve synergies with the target company.

Secondary Buyout: In a secondary buyout, the buyer is another private equity firm. The new private equity owner sees potential value or growth opportunities in the target company and aims to achieve returns on its investment through its own strategies.

Motivation and Expertise:

Trade Sale: Strategic buyers often acquire companies to gain a competitive advantage, access new markets, or enhance their product/service offerings. They may have industry-specific expertise and synergies that can benefit the acquired company.

Secondary Buyout: The new private equity owner in a secondary buyout is motivated by the potential for further value creation or an exit at a higher valuation. They bring financial expertise and may have a different set of strategies compared to the selling private equity firm.

Control and Governance:

Trade Sale: A trade sale may result in a change of control, with the acquiring company taking over the management and governance of the target. The acquired company becomes part of the larger corporate structure.

Secondary Buyout: The change in ownership in a secondary buyout involves one private equity firm selling to another. While there may be changes in governance, the target company typically continues to operate as a standalone entity with a focus on achieving financial returns.

Timing and Exit Strategies:

Trade Sale: Trade sales can happen at various stages of a company’s lifecycle, and the timing may be influenced by market conditions, strategic priorities of potential buyers, and the overall economic environment.

Secondary Buyout: Secondary buyouts often occur after the selling private equity firm has implemented operational improvements and added value to the target company. The timing is influenced by the private equity firm’s investment horizon and the perceived opportunity for the acquiring firm.

Risks and Benefits:

Trade Sale: Benefits may include access to new resources, markets, and technologies. Risks can include potential cultural clashes and challenges in integrating the acquired company into the new corporate structure.

Secondary Buyout: Benefits may include the potential for further operational improvements and value creation. Risks can include the need for continued growth and the ability of the acquiring private equity firm to execute its strategy effectively.

In summary, the choice between a trade sale and a secondary buyout depends on the specific goals and circumstances of the private equity firm and the target company. Both options offer distinct advantages and challenges, and the decision is influenced by factors such as the strategic fit, the growth potential of the target, and the preferences of the selling private equity firm.


Investopedia -Secondary Buyout, Hod does it Work