A trade sale is one of the strategies commonly used when a company is looking to divest its interest in a particular asset. As the name suggests, it involves finding a particular buyer to trade with. Once a buyer is found, the controlling interest in the asset in question is handed over in exchange for an agreed-upon sum of cash.
But as with everything in the M&A world, trade sale deals rarely are as simple as they may seem. This article will explore how trade sales differ from other modes of divestment, situations in which trade sales are the appropriate strategy and how to optimize and streamline your company’s execution of them.
Trade Sales vs. Other Approaches to Divestment
Other common types of divestment that private equity firms engage in are carve-out IPOs, split-offs, spin-offs and joint ventures. With joint ventures a financial commitment is implied on the part of the seller; with carve-out IPOs the seller retains a controlling interest; and with split-offs a controlling interest can be purchased by the seller after the fact.
The essential difference between trade sales and these strategies is that in a trade sale the seller cedes total control of the asset, both financially and otherwise. This is also the case with spin-offs, but instead of the asset being sold to a new buyer, it is simply moved to an independent entity created by the parent company.
Advantages of Trade Sales
One advantage of trade sales is the speed with which they can be carried out relative to other forms of divestment. Whereas carve-out IPOS and spin-offs typically take at least a year and in most cases longer, trade sales are usually completed in 6 to 9 months. This makes trade sales a good option for sellers who need to increase their cash flow fast. They are also a type of divestiture that can be carried out under any market conditions.
A Straightforward Transaction
Trade sales are often preferred due to their inherent cash-for-goods simplicity. Once a trade sale is completed, the seller no longer has to worry about the viability of the asset, and before the deal is done the buyer knows how much they have agreed to pay for it. This dynamic offers much less risk and much more certainty than can be expected from other kinds of divestment. It’s also the case that buyers in trade sales tend to have a better understanding of the asset than in spin-offs or IPOs, since they are motivated (and required) to do their own due diligence. This makes the seller’s role especially simple, in that the majority of their responsibility is in making the asset available and negotiating a price for it.
When Do Trade Sales Happen?
Statistically speaking, the answer to this question is more often than any other kind of divestiture, but there are several recurrent conditions under which trade sales tend to take place. One is when an asset has reached a stage that its current investors wanted it to reach, and they simply do not want to manage it any longer. Since trade sales generate the most cash of any kind of divestment, they are also particularly appealing to sellers during times of market volatility, when IPOs and spin-offs become more difficult to carry out. Additionally, sellers will sometimes opt for trade sales opportunistically, when the market has determined a held asset to be of greater value than the seller would have estimated.
Markets Are Sensitive to Sellers’ Intentions
The quick capital that trade sales result in leads to a good amount of scrutiny. Cash is an easily understood and used tool, and following the full divestment of an asset, markets are anxious to see what the seller needed the money for. A trade sale frees the seller up to reinvest in other existing assets, pursue new opportunities, pay down debt or create more capital for shareholders. Sellers tend to be viewed more favorably if they pay down debt or distribute the newly acquired capital among shareholders. It’s not that new investment ventures are necessarily a sign of trouble, just that there is less certainty in that direction.
Steps to Selling an Asset
Whatever the nature of an asset in a trade sale, there are at minimum six basic steps involved:
- A letter of intent must be written that sets out the terms of the transaction
- The buyer must perform due diligence on the asset
- A purchase agreement must be completed that binds the buyer to the price and terms of the sale
- The buyer’s method of payment must be determined ahead of time
- State and local laws must be understood and obeyed
- Official transfer of ownership must be executed when all other aspects are completed
Virtual Data Rooms for Trade Sales
Required documentation for these steps includes — but is not necessarily limited to — nondisclosure agreements, financial statements going back several years, inventory lists and cash flow statements, all of which are highly sensitive materials that require the highest standard of both security and workflow management.
With state-of-the-art features and round-the-clock customer support, Caplinked virtual data rooms provide the secure space you need to manage any and all documents connected to trade sales. Get in touch today to start your free trial.
Rafael Carillo is a writer, editor and tutor living in Brooklyn.
Boston Consulting Group – Maximizing Value: Choosing the Right Exit Route
Medium – Three Distinct Divestiture Types
Finance Train – Exit Strategies for Private Equity Investors
Upcounsel – Legal Documents Needed to Sell a Business