sWhat deals do you regularly work on?
The deals I’ve been looking at have mainly been providing asset-based lending for businesses refinancing their current debt from other lenders, as the number of transactional deals has been very low across the market.
Do you have much experience of partial exits?
I’ve not seen any completed yet this year, though there is one going through that is still subject to negotiations, which should release around £10 million to two directors who will retain a 22 per cent stake in the company. It’s actually a partial management buy-out, which allows the management team to gain control but the founders will still have a significant involvement, so it’s in their interest to help keep the company running successfully after the deal.
Do partial exits give vendors good value for money?
I’d anticipate that they’ll get a better deal overall, as long as they appreciate there is a risk that if the company fails they may not get the rest of the money. If you take some money now and wait a few years to see what the market looks like then, it will in all probability be a lot better.
Will earn-out deals affect those selling to fund their retirement?
Transactional deals with a performance-related earn-out over an agreed period are becoming more popular, as price expectations have become more realistic in terms of the multiples that people are expecting. Leaving cash in the business can also help the remaining management team and shows vendor confidence in the business, which can probably help to maximise your price.
If you’re selling to retire and take £2-3 million out on day one, then taking another £2 million over the next two to three years might be very attractive. An earn-out related to future performance in a recovering market could deliver good value in a partial or phased exit. Partial exits are a sensible option for retiring business owners as long as they leave a sustainable business going forward.
Why have we not seen more partial exits done historically?
Those organising transactions have been used to the traditional “sale and exit immediately” approach. People have always felt that banks didn’t like equity release because it’s seen as diluting the value of the company and increases borrowings. Perhaps they consider it weakens the balance sheet. However an ABL is able to take a more balanced approach, looking at the asset base, post funding requirements, sustainability of the company and the servicing of increased borrowings.
We have just put together a £100 million ABL Fund aimed at owner-managed and family run businesses. It’s an alternative way of using the business assets to raise cash and maintain control. If business owners decide this is the wrong time for them to exit, the Fund can also be used to raise cash as part of retirement planning.
David Coulton, Regional Director, Venture Structured Finance
Tel: 07703 107 510