Debt finance is an integral part of any Management Buy Out. This debt is repayable over a fixed term, so it is absolutely essential at the outset that we assess how much debt a business can service.
We need to consider past and forecast EBITDA, working capital requirements and capital expenditure programs, so we can evaluate how much debt we can actually service. This also needs to have plenty of headroom, as we don’t want to complete a deal, only to find we can’t pay wages at the end of the month.
This funding is effectively debt finance, where the high risk and little or no security available is compensated by a small amount of equity. Often referred to, as an “equity kicker”.
This layer of funding sits behind any senior debt in terms of security, but receives a higher rate of return (typically 12% – 16%).
At MBO Funding we have access to this type of funding, in return for a small equity stake.
We won’t be using this funding in most cases, but it does provide a viable alternative where clients are willing to relinquish small amounts of equity.
Cash Flow Loans
Cash Flow Loans are provided by banks to effect Management Buy Out’s. They are loans of an amount which is far in excess of the value of the security behind them.
Many banks have now reigned back on this type of funding perceiving it as far too risky.
These loans require the attention of the more skilled individuals within the banks. They are not left to the average bank manager to put together. Consequently this type of funding is only available to the larger Management Buy Out’s, typically where the average EBITDA is > £1m
Typically there have been a number of new specialist lenders entering this market in recent years. typically they will provide cash flow loans of up to 2.5 EBITDA for MBO Funding
We have access to a number of private lending syndicates, that are actively looking to provide loan finance to UK businesses. The funding is provided by private individuals, looking for a greater return on funds than they are currently getting.
In the right circumstances, this route to MBO funding maybe more efficient than going through the tortuous bank lending process and all the “ivory towers” that entails. These funders are usually experienced business people that look at a deal from a “common sense” point of view.
Most Management Buy Out’s will use the services of Invoice Discounting, whereby the discounter provides a cash flow advance (Up to 90%) of the debtor book.
If the business is not already using this type of funding, then this can be implemented as part of the MBO funding package to get a “leverage” of the debtor book and provide a one off lump sum as part of the debt funding contribution towards the consideration.
This funding is especially favourable, as the company pays interest and a fee based on usage. The debt “revolves” and doesn’t have to be paid back over a short time period.
If the business is already using the services of Invoice Discounting, then if necessary we will replace the facility with one of the more “switched on” providers in this area of finance.
In some cases our Invoice Discounting provider had provided not only a discounting facility, but also a top up loan / overpayment on a short term repayment in order to squeeze additional funds from the sales ledger. Often far in excess of a traditional bank discounting facility.
Some discounters will also add on asset finance and trade finance facilities.
In some cases businesses have value within the assets that are unencumbered from any finance.
By using specialist asset finance providers (often not the subsidiaries of the high street banks), we are able to unlock the value and provide a loan (Typically over 3 to 5 years), which forms part of the debt finance contribution to the overall funding requirement.
In some cases businesses have property on the Balance Sheet.
If this is not being used as part of the consideration bundle to the vendor, then we can look to introduce specialist Commercial Mortgage providers that can provide a Commercial Mortgage.
Often the funders we use are small, flexible funders that are willing to provide greater leverage against the asset than the high street banks. Some banks are now declining to even look at lending against property.
Having access to niche lenders through our Commercial Finance Brokerage, we are able to access funders that many of our competitors either can’t access, or have never heard of.
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