By Mike Nolan, Managing Director, Academy Leasing

Successful coordination of a management buyout (MBO) can be a complex process fraught with difficulty for even the most experienced businessperson.

Beyond the typical considerations, such as the potential for profitability and risk, there are a number of further dilemmas around issues such as ethics and future leadership.

But perhaps the most crucial aspect remains sourcing the most appropriate finance, not only to fund the buyout but also to ensure the organisation can adapt and thrive in the aftermath of the buyout.

It hasn't helped that the banks have been reticent to lend due to a shortage of confidence in the overall economy yet that doesn't mean funding is unavailable for those businesses who display a strong capability for servicing the debt.

Asset finance and invoice finance, in particular, are two tried and tested methods for financing an MBO where money can be made available based on the strengths of the business and its potential to avoid future difficulties.

Laying solid foundations

Before embarking on an MBO, it is important to consider a number of factors that may prove make-or-break for its success.

The presence of motivated and committed leadership is crucial. In cases where one person is buying out another, this issue is simplified but when the MBO is being conducted by a management group, it is important to ensure this team has a good blend of skills and a clear understanding of where leadership responsibilities will lie under the new structure.

As such, it is important to have a solid shareholders' agreement in place, which clearly outlines the division of ownership and new management structure, while making provision for future eventualities such as retirement, illness or death.

A cooperative vendor is obviously essential, as an MBO will only be feasible in the long-term if it can be completed at a fair price and under reasonable conditions.

Possibly the most important aspect is the profitability of the business or, at least, its future potential. Obviously, a business with a strong track record of profitability and solid forecasts represents the safest bet for an MBO but the situation is not always that straightforward.

Even profitable businesses may pose risks, such as customer dependence issues, an increasingly competitive marketplace or the emergence of new technology in the industry. The buying party should work with an appropriate financial adviser to ensure their plans are feasible and realistic, allowing them to service any debt imposed during the buyout.

Buying into a success story

In cases where the organisation subject to the buyout can demonstrate solid, consistent profit and guaranteed future revenues, invoice finance represents a good option for securing the necessary funds.

This involves the financier lending money against unpaid invoices as an agreed percentage of the total value and allows the buyers to leverage future success in order to raise the necessary funds.

Such arrangements can be particularly appropriate given many MBOs will include a deferred consideration, where the vendor agrees that the purchaser can pay some or all of the consideration monies for the business from cash generated at a later date.

This can either be paid in one lump sum or in stages but gives the buyer flexibility to assess the money coming into the business, anticipating a period of increased revenue or with the intention of borrowing against a significant invoice expected in the future.

Sweating the assets

However, invoice financing may not always be an option, for example when the buyer is looking to purchase a cash business.

Asset finance represents a strong option by allowing the buyer to borrow money against hard assets, such as the company's property or existing equipment. The decision of the financier to lend depends entirely on their perception of whether the debt can be serviced adequately. This opens up new possibilities in situations where the business has previously struggled.

The buyer may have identified new revenue streams or believe current management is not fully exploiting the available options in order to boost profitability. As long as they can demonstrate a solid business plan and a clear strategy for servicing the debt, they will be able to borrow.

An adviser or asset finance specialist will be able to take a look at the assets and identify how best the money can be raised. Sometimes this can be achieved without the need for any securities but other times, a charge against the property may be required.

Seeking expert advice

Choosing the most appropriate source of finance is essential. Although the banks might represent the cheapest option, they are frequently unwilling to lend and are likely to impose strict conditions on the loan. On the other hand, private equity may mean a patient lender but could also work out very expensive.

Working with an asset finance specialist will allow the buyer to benefit from advice and expertise when formulating a plan to complete the purchase and service the debt.

What many buyers neglect when planning an MBO is that they will not only require money to complete the transaction but also working capital or funds to conduct a rebrand and reorganisation of the business.

In some situations, it may be possible to complete the transaction only for the purchase to prove unviable as the extra funding needed would place too great a strain on the buyer and the business.

Aside from this kind of guidance, working with an adviser also unlocks further possibilities. For example, they may be able to arrange finance for new equipment required as a result of the buyout, allowing it to be paid for over a prolonged period of time.

They might also provide support from their own book to cover any shortfalls that may occur. Usually, such funding would be difficult to find but the specialist will have a strong working knowledge of the business and its availability to service debt so can lend on this basis.

Despite the often daunting nature of MBOs, a combination of diligence and the appropriate expertise will usually ensure the process proceeds without any hitches.

With the right business plan in place, it should never prove too difficult for responsible buyers to find the necessary funding.