Why vendors should once again view MBOs as a viable exit strategy.

Roy Farmer, rfarmer@dains.com

In UK200 InFocus: Experts Update June 2016 (Pg.4)

With many business owners having deferred their exit plans for a number of years following the impact of the recession, we are now starting to see an increasing number of these owners now planning for their exit. Whilst owners will often see a trade sale as being the obvious route to achieving an exit, many will consider a sale to their management team via a management buy-out (“MBO”), and we believe many more owners should now be seriously considering this as an exit option.

MBOs are often ruled out by owners as they believe that the management team won’t be able to raise sufficient funds. Whilst owners accept that some level of vendor deferred consideration in the form of debt and/or equity may be required to support a transaction, they typically expect a significant percentage of the total consideration to be paid at completion, which dependent upon the availability of funding can be a barrier to a transaction occurring. However, in our experience we are now finding that traditional banks and some of the alternative funders are starting to lend in much greater amounts than they were 12-18 months ago.

In terms of the traditional banks, throughout the last few years they have been willing to lend to sound businesses that have assets available to provide to them as security such as property, debtors, plant and stock. However, until relatively recently it was difficult for businesses to borrow beyond this available security (via an unsecured cash flow loan), unless the business was making a minimum of £1m to £1.5m of EBIT.

Our recent experience shows that banks are now much more willing to provide unsecured cash flow loans beyond the available security to sound businesses making EBIT of £500k and above, often at a multiple of say 2.5x of EBIT over a 4-5 year period. This now provides greater funding options for an MBO.

We have also worked with some of the regional debt/mezzanine funders, who will provide funding beyond that which a bank will lend. This funding will often be relatively expensive (often low double digit interest rates, possibly with some form of redemption premium), however if this is the difference between a transaction happening or not, it can be a price worth paying. It is also common for this more expensive debt to be refinanced at a later date, so the higher cost of this money represents short-term pain.

Finally, peer-to-peer lending is starting to mature as an industry and become increasingly prevalent. We have found this source of finance can also be extremely useful over the short-term, and allow a transaction to happen which might otherwise have not. In summary, in the past 12-18 months we have seen a significant uplift in the appetite of debt funders to support businesses and transactions, and this is great news for MBO transactions.

For further information please contact Roy Farmer on:

Email: rfarmer@dains.com

Tel: 0121 2007903