22/12/2011

By Brian Livingston, Head Of Mergers & Acquisitions at Smith & Williamson

There are many owners who had planned on selling their businesses by now, but as a consequence of the ongoing recession, it just hasn’t happened — the clocks have been forcefully turned back. So, instead of selling, they may want to take some cash out of their businesses to provide security for themselves and their families.

Another scenario where cash may need to be taken out is when, for example, there are two shareholders and one of them is retiring. Unless personal funds are available, the shareholder who is staying in may not want to be left with burdensome debts when his partner is safely out, so may also like some cash.

If your business is profitable and has good growth prospects, one option worth considering is to sell part of the business to private equity investors with a view to selling the rest in a few years’ time. Private equity houses have differing views on this — some will do it, some won’t and some will do it a little bit.

The outcome will often depend on how much you want to take out of the business and how much you leave in, as private equity investors believe business owners are much more motivated when they have a significant financial interest in the business.

Another possibility for getting cash out and passing the business on to a partner or to the next generation is a vendor-initiated management buyout (VIMBO).

Let’s say a father sells his business to his daughter for £2m in cash (funded by the business) and £2m in vendor loan notes (lent by the father). Loan notes are a popular way of keeping the business in the family if one member wants to retire. Essentially, they are an ‘IOU’ issued by the company, which is paid off over the years as the company makes profits.

This can be tax efficient for the seller, much cheaper than private equity or a bank loan and can generate high yields. There is low transactional risk and banks generally like loan notes as the seller retains a stake, is often involved on an ongoing basis (perhaps as a non-executive director) and is incentivised to help grow the business. Once the loan note has been repaid the daughter will fully own the company.

Loan note arrangements are particularly attractive for family-owned businesses because the deal is private and no external sources need to know. Unlike private equity, management won’t be forced to sell in three or four years’ time and the business can stay in the family.

On the downside, the buyer may have to agree to certain limitations on their behaviour in exchange for the loan notes, for example, not to borrow more money, not take a salary beyond agreed levels or not to take dividends.


To find out how you can take cash out of your business, or structure a future change of ownership, speak to Brian Livingston on 020 7131 4914 or email brian.livingston@smith.williamson.co.uk

Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

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