Achieving a Management Buyout without some element of vendor assistance is almost impossible in today's market conditions. James Sage, corporate partner at West Midlands' law firm FBC Manby Bowdler LLP, looks at how vendors have had to change their price expectations and the way they participate in MBOs in order to achieve a successful exit.
It is now more than two years since it appeared that the tap had been turned off for funding for leveraged corporate transactions, including management buyouts, of owner managed businesses, particularly in the pounds 1 million to pounds 10 million category.
Although the appetite for owners to exit remains unchanged, the options open to them for a sale have been sharply reduced.
One of the most common ways of exiting in the last 20 years has been for business owners to encourage and develop a management team with sufficient expertise and standing to attract finance to undertake a management buyout.
However, the economic downturn has meant that although the desire may still be there, most management teams, no matter what their business acumen, have struggled, and are continuing to struggle, to raise a sufficient level of finance to undertake an MBO. In the current economic client there still appears to be a general shortage of capital, both in terms of bank and personal finance, and this is reflected in the reduction of sources of funding for MBOs.
We are aware of a number of businesses with proven track records which have been with the same bank for more than two decades, in industry sectors which, although troubled, are at a level where somebody needs to be in the market and they continue to receive support from their customers, yet the banks have still not had the appetite to provide funding.
With this in mind prospective vendors now have to consider all ways of assisting with a sale, including accepting a more realistic value for their businesses, and agreeing to a substantial deferment of consideration; in some circumstances, even deferring all of the consideration.
The alternative to not agreeing a deal for many owners is simply to shut up shop. We are aware of a number of retiring owners simply closing down their businesses while still solvent. Previously most of these businesses would have been successfully sold and continued to thrive, benefitting both the vendor and new management team.
So, while deferring consideration has obvious risks for future payment and uncertainty as to what will happen with Capital Gains Tax concerning business assets, many owners are now willing to take a calculated risk, and proceed down a route which 30 months ago they would not have considered.
Funding a deal by deferred consideration can in many circumstances reassure a lending institution to help with finance, even if this is only by way of a short tem loan, which gives the management team a little breathing space to start to grow the business and meet the vendors' payment targets.
The deferred consideration can take the form of cash, loan notes and even shares in the business, or in some cases a combination of all three. Typical time periods for the deferral, range from one to five years, but longer periods of up to six to eight years are now becoming more common. …