Buy-Side vs. Sell-Side In The Financial Industry

Corporate transactions have two sides, a buy side and a sell side. Discover the difference between buy-side and sell-side, including buy-side vs. sell-side due diligence.

What Is Buy-Side?

M&A deals have two sides. One company takes over (or merges with) another. They are known as the buyer or the M&A buy-side. The company that is being acquired is known as the seller or M&A sell-side.

What Is Sell-Side?

Sell-side is the opposite of M&A buy side. It refers to the company that is looking to be acquired. Companies that seek an exit strategy via M&A typically work with a sell-side partner to identify potential buyers. This makes it easier than if the company tried to sell itself on its own.

Differences Between Buy-Side vs. Sell-Side

The buy-side and the sell-side are complementary. You can’t have one without the other. However, they are at cross purposes. The buyer wants to get the best deal for the lowest price. The seller wants to get the best deal for the highest price.

The roles and duties are a bit different on each side, too.

On the buy side, companies are seeking to buy. Financial analysis will focus on the aspects of the deal, making sure all ducks are in order for the transaction to proceed smoothly. The buy side is all about analysis, purchase and investment.

On the sell side, companies are looking to create liquidity, build relationships and raise capital. In this case, it’s through M&A deals. The sell side is all about promoting, generating interest and getting buyers.

While we are talking about the types of M&A deals, it’s worth pointing out that all types of financial transactions have a buy side and sell side. Buy-side markets focus on the purchase of stock shares, bonds and other investments. The sell side of these markets focuses on selling these securities.

Buy-Side vs. Sell-Side Investment Banking

Here, see how buy-side and sell-side parties work together across three types of investment banking deals:

LBO

In a leveraged buyout, the buy-side company borrows a sum of money to acquire the sell-side company. Since the deal is financed or leveraged, it's known as a leveraged buyout. Companies can borrow as much as 90% of the equity needed for the deal, putting up as little as 10% of the deal price.

LBOs are somewhat unpopular because the sell-side company may not have a say in the transaction. They are sometimes interpreted as aggressive or hostile deals. Elon Musk's takeover of Twitter is the most notable leveraged buyout in recent history, and the public reaction to that illustrates the backlash that may accompany an LBO. From the buy-side, that's something to be aware of and for which to prepare.

All Cash

All cash deals are straightforward. The buy-side company purchases all shares of the sell-side company. Sell-side shareholders receive cash for their shares. In some cases, buyers pay above asking price to incentivize the deal.

Buy-side companies may have cash on-hand to finance the deal. If there isn't enough on the balance sheet to finance an all cash deal, they can take out a loan, issue bonds, or tap other assets to bridge the gap.

The cloud-based software company Coupa Software was purchased in an $8 billion all cash deal. Space infrastructure company Maxar was purchased in another all cash deal, with shares going for 130% over asking prices.

Stock for Stock

In a stock for stock deal, companies merge by trading their stock with each other. The sell-side company trades shares to the buy-side company. The buy-side company acquires the sell-side company. The sell-side company gains shares in the new entity.

Stock for stock deals are easier to execute than all cash deals. Companies can use their existing shares as assets rather than raise capital to finance the deal.

Institutions

On the sell side, institutions typically involved include board investors, investment banks, underwriters, brokerage firms and advisory firms.

Institutions involved with the buy side often include advisors, pension funds, hedge funds, majority investors, underwriters, and private equity firms.

Get Organized for M&A Deals

Whether you are on the M&A buy-side or the M&A sell-side, it’s important to have a central place to organize all documents for the financial due diligence phase of the merger or acquisition. Virtual data rooms provide a secure, all-in-one platform to support M&A solutions for buy-side and sell-side. A virtual data room allows both sides to upload files, perform due diligence, and review confidential information with baked-in security features such as encryption, redaction, and dynamic watermarking.

Buy-side and sell-side players, including investment banks, rely on a virtual data room software to organize digital files, securely share information and provide a private repository for M&A due diligence. Discover its popularity today.