Category Archives: Corporate Finance

Asset based lending and your MBO

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One of the key objectives of any management buy-out (MBO) team is usually to minimise the level of equity funding required to complete the deal. A greater proportion of funding derived from debt means a greater proportion of equity in the hands of the MBO team, and what is not to like about that?

So, what is asset based lending (“ABL”)? An ABL facility is provided against a wider pool of assets than mere factoring or invoice discounting and so, in theory, a greater amount of funding should be possible. The debtors will, of course, be included via invoice finance, but a lender will also include stock, plant and equipment and possibly property, although property lending is not necessarily everybody’s cup of tea. You could also securitise forward income streams assuming they are sufficiently robust.

Historically, smaller SMEs have found it difficult to secure ABL facilities but in recent years the number of providers lending to this sector has increased markedly. Invoices will normally attract an advance rate of somewhere between 70% and 90% with stock and plant possibly up to 75% of net orderly liquidation value. What does that mean I can hear you say? Basically, because assets such as stock and plant usually carry a higher realisation risk than debtors, the lender will independently assess what they might be able to sell those assets for in the open market on a reasonably quick but controlled basis, knock off some costs and then lend up to 75% of the net figure. Hence their back is covered but you get more borrowing.

For companies with very strong cash flow, an ABL may also consider a top up cash flow term loan to increase liquidity and headroom.

There are some key benefits to ABL. As your business grows, so can the borrowing when you need additional working capital. Security is very specific and because additional assets can be included and assessed separately, more funding can be unlocked than through a traditional bank loan or overdraft. ABL is often much quicker to deliver, with additional funding as the business grows being speedily provided. For larger companies, pricing ought to be competitive with more traditional lines of funding.

There can be some things to watch out for though. For smaller companies, the pricing may well be more expensive as small often equates to greater risk in the eyes of a lender. But hey, you got your money, didn’t you? If your business is cyclical, your funding line can reduce quickly as your debtors fall in the off season. In this case, it is critical that you have quality forecasts available so that you understand the working capital requirements at all stages of your business cycle. You really don’t want to over-borrow against debtors at a high point to get the deal done but then find you run out of cash subsequently.

If you are contemplating an MBO or perhaps an acquisition, get in touch. We know the market and have the experience to help you.

Jim Akrill
Jim Akrill
Corporate Finance Partner
Email: jim.akrill@pmm.co.uk
Tel: 01254 679131

 

 

 

Are You Ready For Your MBO?

shutterstock_274686614 (1) So, you are currently working in a management role, but with no, or minimal, shareholding in the business and you believe that the current owner is thinking about retirement or perhaps going off to do something else altogether. Suddenly, you may have the opportunity to buy the business and have the potential to benefit from all your hard work and those great, new, business ideas you have been harbouring. It sounds to me like you have a chance to do a management buy out (MBO).

Where to start?

The first step can often be the hardest to take. You must raise the matter sensitively with the owner and how you do this will depend on your relationship with him or her. What you mustn’t do is kick anything off behind the owner’s back, as this may be upsetting as well as possibly being in breach of your contract of employment. You need the owner on your side. Assuming you get the green light, who will be in your team? Whoever it is must be 100% committed and understand the risks and rewards associated with being a business owner. Each team member will be asked to invest some capital personally and may also have to sign up to guarantees. You must suss out who is up for this. You don’t want anyone pulling out part way through because that would be very disruptive. Importantly, your team must be complete and cover all the bases; management, sales, production and finance. Finance is particularly critical. MBOs often require a significant level of debt and operating in this environment may require a change in emphasis to focus on cash flow, margin and cost control as well as the all-important sales figures.

Plan early

You will need a robust business plan so the sooner you can get cracking on this the better. Your MBO will more than likely need financial backing from one, or perhaps more, lenders or investors. They need to understand the business, believe that you and your team can deliver your growth plans and see how they can make a return.

Choose your advisers

You will need a corporate finance adviser. Don’t go for cheap. Don’t be tempted to go with the current company accountants as they will almost certainly advise the existing owner and thus have a conflict of interest. Choose an experienced adviser who has a track record in completing MBOs. Importantly, choose an adviser you can get on well with if the going gets tough.

Spring clean the business

Work with the owner and your advisers to tidy up before you start talking to funders. They will subject the business and your plans to detailed due diligence so you don’t really want any surprises.

Choose your financial backers

Your financial backers will be an integral part of your business life for at least 3 years and perhaps more. You need to choose those who you can rely on for support. Hopefully, things will all go according to plan, but if they don’t, having a supportive and flexible backer will be crucial. Your corporate finance adviser will know who to approach and what they want to hear.

Jim Akrill - website
Jim Akrill 
Corporate Finance Partner
Email: jim.akrill@pmm.co.uk
Tel: 01254 604353

 

Funding in the professional services sector

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As many will know, accessing funding in the professional services sector can be a challenging task with most firms being short on tangible assets for security purposes and potentially long on work in progress lock up, especially where conditional fee arrangements are involved. In reality, the most valuable assets are people, and try offering those up as security for your loan or overdraft!

Historically, funders have tended to blow hot and cold with regard to law firms with the appetite for lending variable dependent upon how sector sentiment is running. However, that need not be an obstacle to securing the cash you need and it is worth re-focusing on some of the key drivers.

Financial management – You need to be able to demonstrate sound financial management, particularly working capital management through regular client billing of time spent and disbursements. Allied to this is the ability to produce accurate and timely management information.

Client base –  Ideally there should be a good spread of quality clients and sources of profitable repeat work. Over reliance on a few major clients may be seen as a potential weakness.

Nature of specialism – Firms that specialise to any material extent in work which necessitates lengthy lock up, for example conditional fee arrangements, clinical negligence and criminal cases or where the outlook is less favourable, for example legal aid, tend to be viewed less positively.

Sustainable drawings policy – Where drawings are at a level where inadequate profit retention is demonstrated, or worse still, where these result in increased borrowings, it will have a negative impact on lending appetite.

Partner/staffing structure – There will often be an optimum partner/staffing structure which will maximise profitability and cash flow. It could be a negative sign if this is deemed to be too top heavy where there is insufficient delegation of work and high salary levels which depress profitability.

Reputation – A firm’s reputation and its profile in any specialist areas are critical in attracting and retaining the “right people”, which in turn can stimulate a lender’s confidence in the business. For example, a firm with a poor claims record and higher than normal Professional Indemnity Insurance premium would be looked upon less favourably.

Of course, if it is funding for an acquisition that you are looking for, the issues can be somewhat more demanding and also complicated by the funding position of your target, all of which will have an effect of the price of the acquisition and how it needs to be structured, i.e. over what period of time can you afford to pay the vendors. Conversely, as a vendor, your business will look more attractive if a purchaser is not inheriting your cash flow and funding issues.

So, if any of this rings a bell, please get in touch for a no obligations discussion.

Jim Akrill, Corporate Finance Partner (Jim.akrill@pmm.co.uk).

 

INTERVIEW – Tim Mills, Corporate Finance Partner, Answers Your Questions On MBOs

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1. How is the transformation from senior manager to a seat on board best achieved in operational and preparation terms?

If a position on the board is on the table then it is essential that the individual does not feel overwhelmed by the opportunity. They should be invited to observe board meetings and given an overview of the current directors, before being made a director.

Any gap left within the management team by a person moving to the board should be anticipated and the necessary plans put in place ensure the promotion does not have a negative impact on day to day operations.

2. Raising the subject of a MBO can be difficult. Where does the conversation start? How is it best approached?

To enable the topic of a MBO to be raised by management there needs to be a willingness between all members of the MBO team and the business owners. If management are instigating an MBO then they should confirm with the owners their interest and agree who will form the MBO team.

Discussions can begin on an informal basis but should become more formal as matters progress and external advisers are engaged. It is also important to agree who will be responsible for settling the potential fees involved in a MBO. This is particularly important if the deal fails to reach completion.

Business owners that are well advised should have an outline of an exit plan. This may well include the option of a MBO which may lead them to commence discussions with management. In this situation the early decision for management is whether they actually want to become business owners.

3. How do you go about valuing a business for an MBO? What are the main issues?

The approach to valuing a business for a MBO is the same as when valuing a business for a trade sale. It will usually be on a maintainable earnings basis with a relevant multiple applied. However, the value that vendors may agree for a deal with a MBO team will often below what they would require from a trade sale. This is due to a number of factors that only apply to a MBO. These include the vendors passing the business to a team that have helped develop it; the vendors would expect to be agreeing to substantially reduced warranties and indemnities within the legal documentation and a MBO could provide more security for retaining employees than a trade sale.

These factors carry a value for the vendors which they must try to quantify as the overall consideration they will receive from a MBO will invariably be below a sale to an external party.

The key issue for a MBO team is to agree a value that is acceptable by the vendors but does not require the MBO team to agree to terms they feel are unfair.

4. Sourcing funds isn’t so much of a problem in 2016, but choosing an effective funding structure can be challenging. What are the options for structuring a buyout?

The funding structure will be dependent upon a number of variables. These include how much the MBO team have available, how much the bank or other funders are willing to lend to the MBO team, what security is available and how much the vendors are willing to leave in the business as deferred consideration. The choice of funding will also be based upon the size of transaction which may require private equity funding in addition to debt.

The key to structuring the deal is to ensure the funding required fits within the current business, together with the future plans the MBO team may have. The more a deal can be de-risked from an external funding perspective the more attractive it becomes to them. Therefore, including a reasonable level of deferred consideration into a structure is advisable, particularly where the vendors may remain with the business for a period of time after completion.

Structuring a deal that fulfils the requirements of the vendors, the MBO team and potential funders is rarely straight forward and advice should be obtained at an early stage by the MBO team.

5. What are some of the pitfalls along the way to completing a buyout?

Completing a MBO is often quite stressful and can change the personal relationships that the MBO team had with the vendors. This is often the case when the vendors remain in the business for a period after completion and effectively become employees with former management now becoming their bosses.

The transaction can be time consuming and can lead to those involved losing focus on the current business operations. This in turn can impact on trading performance and give rise to concerns for funders even before the MBO takes place.

Ensuring all of the MBO team agree on decisions as matters progress can cause issues and may result in some of team deciding to no longer be part of the MBO before completion.

If any of the above topics resonate, please feel free to contact a member of the PM+M Corporate Finance team on 01254 679131. Whether you are considering a MBO or thinking about selling your business, the team will be more than happy to sit down with you for an initial fact-finding discussion and explain how they can help you make the process as simple and stress-free as possible.

 

QUESTION – WHAT’S THE SECRET TO SELLING YOUR BUSINESS?

Business for saleANSWER – THERE ISN’T ONE!

As a business owner, you have probably seen countless articles reeling out the top 10 tips on how to prepare your business for sale and wondered where to start.

The good news is you only need to think about a couple of things.

  1. Don’t leave planning until you want to retire. If you do you risk working a lot longer than you might like, whilst wondering if you can afford to do without the income your business provides.
  2. Take a look at recent business sales in your sector. Why do you think they were good buys? Does your business look like a good buy in comparison?

These questions will force you to consider two things: your long term financial plan and the part the value of your business plays in it, and what you can do to make your business look more attractive to buyers.

So, get planning for a long and happy retirement! And if you need advice, ask an expert who can see the bigger picture and position the sale of your business within that picture. Don’t leave it to chance.

For more information, contact Jim Akrill (jim.akrill@pmm.co.uk) or Tim Mills (tim.mills@pmm.co.uk) on 01254 679131.

www.pmmbusiness-sales.co.uk

BREXIT – An Opportunity To Plan

shutterstock_439389007It is impossible to avoid the endless debate and commentary on what the future holds for the UK following last week’s vote. Businesses will undoubtedly be affected but SME owners should use this opportunity to review their plans for the future and consider the options they have available to them. Those with growth plans should not put these on hold but ensure they have made themselves aware of any issues that leaving the EU may give rise to.

Having spoken to a number of banks, the fear they have is that businesses will not want to take on additional borrowings for the foreseeable future. This seems absurd when they are keen to lend. Businesses should keep in regular contact with their bank and discuss their plans with them. They will more often than not be supportive.

The availability of debt presents an excellent opportunity to those business owners who are planning to sell in the next few years. This may have been originally based upon a sale to a third party. However, the current uncertainty will probably lead to a reduction in the number of potential trade buyers and will have an impact on the multiples buyers are willing to pay. A Management Buy Out (MBO) could be the obvious answer.

There will be a number of businesses that have a management team in place, that given the opportunity to undertake a MBO, will jump at the chance. The message to the owners of these businesses is start talking to the management team NOW!

For those businesses that do not have the necessary management structure for a MBO, the current economic climate gives them time to plan and put the required team in place. This requires careful consideration and the requisite advice should be obtained as part of this process.

Therefore, business owners who want an exit in the short to mid-term, should seriously consider if an MBO is an option. If it is, then speak to your bank or your adviser. I have been involved in a significant number of MBOs and PM+M Corporate Finance are currently advising on a number of MBOs. Therefore if you want to pick our brains on the subject, please feel free to give us a call.

Tim Mills – Corporate Finance Partner 
Jim Akrill – Corporate Finance Partner 

How To Make Your MBO Successful

shutterstock_72605086I was struck recently when reviewing recent MBOs just what a wide range of industries were being covered. And not just traditional, asset rich businesses either. There were several professional service businesses too which can be much more of a challenge when trying to secure funding.

This led me to think again about what makes a good MBO opportunity. A complete and competent management team, a growth story and a flexible seller willing to do a deal which is affordable. Tick these three boxes and you are on your way.

Moreover, general optimism about the economy combined with an increasing number of older business owners looking to retire has created a favourable climate for MBOs.

Only one thing left then. A quality team of advisors. Contact “The Real Deal” Team. To find out more about the PM+M Corporate Finance team visit www.pmmbusiness-sales.co.uk or contact:

Tim Mills – Corporate Finance Partner (tim.mills@pmm.co.uk)
Jim Akrill – Corporate Finance Partner (jim.akrill@pmm.co.uk)

PM+M Client WEC Group Limited Acquire HTA Group

shutterstock_234197374Last week saw the completion of the multimillion pound acquisition of HTA Group by PM+M client WEC Group Limited. The acquisition will enable Lancashire-headquartered WEC Group to continue to dominate the UK’s laser cutting and fabrication sector.

Wayne Wild, commercial director of the family-owned WEC Group, said: “This is an exciting new chapter for HTA Group, its workforce and its present and future customers.”

“HTA’s partnership with WEC Group will create a major new force in the UK’s laser cutting and fabrication sector and allows both companies to offer more to our customers.”

“Continuous investment in new technology and in our workforce has been the hallmark of the WEC Group’s success and we’re delighted to welcome HTA into our growing family. It’s a really great fit for our business.”

“As another family run company we’re aware of the name HTA has forged for itself and its reputation for high quality work, service and delivery. Our aim is to build on that.”

“Both companies share the same values of continuous investment, commitment to training and a strong belief in customer care. That’s why we believe this new partnership is right for both businesses.”

“The expanded group makes us one of the largest laser cutting and fabrication operations in the UK. It means we can offer more services and skills to our customers.”

Jim Akrill, Corporate Finance Partner at PM+M, provided commercial advice, comprehensive deal support and financial due diligence to ensure the deal was completed satisfactorily. Jane Parry, PM+M Managing Partner, also advised on the complex tax matters surrounding the acquisition. Forbes Solicitors provided legal advice throughout the deal.

Preparation Is Key

 

shutterstock_276798482Your business represents a lifetime of blood, sweat and tears so when the time comes to sell it you need to make sure that you are ready. You may feel that you are not ready to sell but if you’re planning for the future you need to start adding value to your business now.

The more time you spend preparing your business for sale, the better the outcome will invariably be. It is important that you can demonstrate two to three years of strong trading performance together with a maintainable profit stream.

Unresolved issues can be a deal breaker and can range from complex company ownership or who owns intellectual property rights, through to unreliable management systems. In your preparation for sale it is vital that you consider any potential deal breakers and try to resolve them before selling.

Effective and efficient planning will allow the sale of your business to progress in a controlled manner and having an advisor to provide advice and support throughout the sale of your business, will help you to achieve your goals.

For more information on selling your business, please click button below.

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SME Values On The Rise

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Recent data indicates that multiples being paid for SME businesses is increasing. Clearly this includes a large range of deal sizes and different industry sectors, but this is excellent news for business owners considering their exit options. The Small and Medium Enterprises Valuation Index issued by the UK200 Group indicates the mean P/E (Price / Earnings) multiple was 9.6 at November 2015 compared to 7.3 at November 2014.

Achieving a successful disposal requires planning to ensure the business is well positioned to achieve its full value. In general the longer the length of time available to plan for a sale, the better the outcome. There are however a number of areas within a business which may only require a few simple changes, that in turn lead to a significant increase in the value achieved on a sale.

Expert advice should be obtained on the areas to consider when there is a relatively short amount of time available before selling. These simple changes can increase the overall value of the business without impacting on the day to day operations. When you consider that many businesses sell on the basis of a profitable multiple, a £1 increase in after tax profit equates to an increase in potential value of £9.60 based upon the above P/E average.

There are currently many trade buyers with cash resources, who are looking to make acquisitions. Furthermore there are debt and equity providers with funds that require lending and investing. The combination of these are leading to more potential buyers and so if you are thinking about your exit strategy, my advice is…

Get on with it.

Tim Mills – Corporate Finance Partner

Family businesses often give rise to issues and opportunities not found in other companies. The PM+M Corporate Finance team are hosting a seminar to provide you with valuable information and simple, adaptable methods to increase the value of your business, whilst overcoming family and non-family issues.

Date: Wednesday 20 April 2016
Time: 8am – 9am (breakfast will be included)
Venue: PM+M, Greenbank Technology Park, Challenge Way, Blackburn, BB1 5QB

To book a place on this seminar, please email seminars@pmm.co.uk or call the Marketing team on 01254 679131.