Deal Advisory

Trade Player v Private Equity: Why Understanding the Modus Operandi of Different Acquirers Is Essential for Making the Best Deal

Ann-Marie Costello
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Throughout the past number of years, Ireland has become an increasingly attractive market for international players seeking to acquire new businesses. The strength of the Irish economy combined with historically relatively inexpensive debt has enabled shareholders of domestic businesses to capitalise on opportunities for growth. The local talent pool and expertise—especially in specific industries such as engineering, manufacturing, technology, healthcare, and pharma—has contributed to the development and expansion of many successful home-grown businesses.

The success of these businesses hasn’t gone unnoticed: numerous acquirers have been turning their attention to the Irish market, looking for opportunities to purchase or invest in Irish businesses. Trade players that traditionally invested on the continent and in the UK have come to regard Ireland as a booming market and home to businesses at the ideal stage of development for further internationalisation. Likewise, in recent years, international private equity players have been investing more actively in the Irish market, finding a plethora of businesses that they can invest in to develop and scale. Concurrently, indigenous Irish private equity has grown tremendously in the past decade, and, in a post-Brexit environment, UK private equity players have ramped up their investment in Ireland’s business landscape.

Ireland has enjoyed an unprecedented level of deal activity over the last number of years. While inflation, rising interest rates and geopolitical concerns have contributed to 2023 deal volumes reducing from their peak in 2021, there continues to be keen interest in Irish assets, with particularly active sectors including TMT, business services, industrials/ manufacturing and financial services.

Given that the Irish acquisition market remains very active, many shareholders may be considering divesting and selling their business. The most successful deals ultimately meet the needs and aspirations of both the vendor and the purchaser. Therefore, to find the deal that works best for them, shareholders first need to understand the motivations and goals of the different types.

What do Trade Players look for in an acquisition?

Trade players usually seek to buy a business outright, acquiring 100 percent of equity in a company. These acquirers generally know the industry or sector well, including the market and strategic value of the target’s product/ service and customer base. The reasons for a corporate making a strategic investment are wide-ranging - from ready access to a new market, an enhanced product or service range to taking out a competitor or capitalising on the synergies achievable from combined operations. Many large international players are purchasing smaller companies in the same line of business that provide larger strategic value - a “buy-and-build” strategy.

In many trade acquisitions, the vendor shareholder will remain with the business for a short period of time post transaction to manage the transition. However, deal structures are becoming more creative, with various mechanisms being used by buyers to deal with challenging economic conditions, including increased financing costs – these include deferred consideration, earn outs and consideration being paid in the form of equity in the buyer, rather than pure cash. These structures mean that vendors are likely to remain with the business for a period of time to actively drive the business. 

In a trade acquisition, a shareholder cannot be too attached to the future of their business or the legacy of its brand. As part of the new ownership, trade players are likely to overlay some of their structures and procedures, but this is usually done in a managed format over a period of time post transaction to ensure customer continuity and manage integration.

What does Private Equity look for in an acquisition?

In a private equity (PE) deal, the acquirer purchases a stake in the business, with the vendor retaining a share of the ownership; the percentage stake taken by the PE investor varies, with some firms focused solely on minority investment, with others solely interested in majority acquisition. Either way, this allows the vendor to partially de-risk and take some money off the table. Together, the shareholder and PE investor work to grow the business before selling it on to another private equity or trade player. Deal timelines can vary and while traditionally a private equity investment would be expected to be held for five years, this can vary depending on the nature of the financing of the PE firm, the success of the investment and prevailing economic conditions.

PE aims to scale the business so that at the end of the investment horizon, their stake—as well as the stake retained by the shareholder—is worth significantly more than when purchased. Essentially, the PE firm is motivated to achieve certain required investment returns.

Engaging in a PE deal provides access to both the funding and know-how required to grow a business to the next level. Private equity can supply a bank of non-executive directors who bring specialised expertise, and it can also commit additional capital throughout the investment period for acquisition opportunities or large CapEx programmes that can benefit business growth. Most PE players aren’t interested solely in the organic growth of the acquired business: the mechanism for growth is often a combination of pure organic growth as well as via acquisition.

As part of the deal, the shareholder and the acquirer agree to a business plan with milestones and timelines. The acquirer will help empower the stakeholder to bring that plan to fruition and maintain oversight of the business, but they won’t be in the day-to-day operation of the business. During this time, the PE investor may expect the shareholder to take on a more global and strategic role because, if the shareholder is still integral to the business’s success at the end of the investment horizon, it could potentially make the proposition less attractive.

When looking at a ‘platform’ acquisition, a PE firm likely doesn’t have any companies in their existing portfolio that operate in the market or sector, so they’re looking to acquire a larger business, often with a ticket size of minimum €3-€5 million EBITDA. Many international or more mature PE houses will already have a platform within a certain sector, and therefore will be looking at ‘bolt-ons’ or ‘tuck-ins’. This creates a sector specialism that allows them to bring greater industry knowledge to a deal, perhaps allow a full vendor exit and allow them to consider acquisition of smaller entities, where they can expand the portfolio’s geographic footprint, services or products. 

In Ireland, over the past decade, many international PE players have begun to participate in mid-market deals in sectors where they already have a portfolio of assets. These players have recognised that Ireland contains excellent acquisition opportunities for bolt-on companies, despite these opportunities being of a smaller scale and ticket size than they would have traditionally participated in. As a result, some PE have begun to set up specific funds to target smaller-scale businesses or indeed funds targeted at a specific sector, which means that mid-market Irish shareholders have a lot more access to private equity acquisitions than they did previously. 

What’s best for you?

Ten years ago, the PE market in Ireland was underrepresented and there may have been a general skepticism by shareholders about giving up a slice of the pie. However, there have been many successful PE exits in recent years which have demonstrated the great opportunity there is to capitalise on the significant upside available as part of a PE transaction.

Many vendors remain unsure about their preferred route until they’ve taken part in a process; where they get to fully understood what the intentions of the various investor classes are for their business and what role/ opportunities they want in the future.

Vendors need to consider what is right for them in terms of choosing an investor – What is the motivation for sale e.g. retirement, succession? Do they want to fully derisk, take the money off the table and walk away entirely? Do they simply want a liquidity event but to partner with a party who will help them to deliver the maximum potential of the business without having to bear the weight of that risk entirely?

How Grant Thornton can help with your acquisition deal

As a member of Grant Thornton International, a global provider of advisory services operating in more than 145 markets with more than 68,000 employees, Grant Thornton Ireland has access to a vast network of domestic, regional and global corporate finance experts. Our firm works closely with key players across the UK, EU, US and Asia. We source deals throughout these regions and more, connecting domestic businesses with Irish and international trade and private equity players. In addition to our in-house expertise on Ireland’s most attractive sectors, we can also draw on the expertise of these international relationships to find the best deal for your company.

Grant Thornton Ireland provides a full-service, holistic approach to M&A advisory. Our Deal Advisory team can assist in preparing the business for sale, ensuring structures are in place to maximise consideration, supporting the due diligence process and negotiating the best possible outcome.

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