Over the last year we have received an increasing number of enquiries from individual investors and investment groups, some of whom are open to putting equity into a deal and some who are looking for a purely leveraged buyout.
Many deals will involve an element of deferred payment and/or earnout. However, a purely leveraged buyout (LBO) is a deal where the buyer raises funds for the amount to paid on completion from the assets of the company being acquired. In most cases, the amount offered on completion is the sum of the funding that can be raised through invoice financing on the trade debtors (typically 80% of the debtor book) plus any surplus cash in the company. For engineering businesses with plant, finance can also be raised on the physical assets. The remainder of the deal value is then paid as a deferred payment from cash flow over 2 to 5 years post sale.
Such deals can work well in cases where there are significant balance sheet assets and a business owner/director who is open to taking the risk on the deferred element of the deal in return for a higher overall deal value. An upside share of the growth and/or equity in the buyer’s group company can often be negotiated too.
On the flip side, there is always a feeling from the seller’s point of view, that the buyer is buying the company with the seller’s money! It also begs the question: Can anyone buy a business?
In theory, yes. In practice, NO!
Buyers must be able to demonstrate and articulate what they will bring to the business.
Most businesses on the market for sale have been built up over many years. Their business owners have taken risks, worked all hours, and put their homes on the line as security to the bank in order to get the business to where it is today. This and the ongoing job security for staff will be high up in the business owner’s mind when contemplating which buyer to sell to.
Buyers must be able to demonstrate and articulate what they will bring to the business. What experience do they have in the industry? What is their track record? What deals have they completed recently? What are the names of the businesses do they own currently? How will they manage the business day to day? If new to acquisitions, buyers must be able to demonstrate a successful operational career with a credible CV.
Buyers must have a significant amount of cash reserves.
Moreover, as testament to the buyer’s commitment to make a success of the business, and therefore be able to make good on the deferred payments, buyers must be prepared to demonstrate their own cash reserves either to support future cashflow or to put a significant portion of cash in the upfront payment.
In qualifying buyers for our client’s businesses, as well as vetting the buyer’s funding capability, we are very much involved in vetting the buyer’s CV and making sure the buyer is right for the business.
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