07/11/2011

By Brian Livingston, Head of Mergers & Acquisitions, Smith & Williamson

An interesting development in the current mergers and acquisitions (M&A) market is the emergence of the hybrid private equity/trade buyer — a kind of private equity buy and build approach, in contrast to the classic trade buyer who bids for businesses in the same industry in order to achieve potential synergies and cut costs through economies of scale.

These hybrid trade buyers - often fast-growth, private equity-backed businesses on the lookout for meaningful acquisitions that will offer synergy and scale — like a traditional trade buyer, often don’t need access to finance for the acquisition. Or if they do, it’s generally finance linked to their existing business rather than leveraged finance. In other words, if a company making profits of £50m is buying a company for £4m, then the existing balance sheet should be strong enough to support the acquisition.

This is often not the case with private equity buyers for whom the decision to purchase depends on the results of the target company. Usually, then, the transactional risk is significantly lower with a trade buyer compared to a private equity investor.

A further advantage of a trade or hybrid sale is that the buyer is likely to have a deep understanding of the business. For this reason, the hybrid buyer is unlikely to have to rely on commercial due diligence to obtain funding. Moreover, this knowledge of the business reduces the need to retain all of the existing management team — which would be necessary in a pure private equity purchase.

Pure private equity buyers are still around, although they are less likely to outbid their trade buyer rivals than in the pre-recessionary M&A world. The new hybrid trade buyer could, however, present a welcome alternative, especially if the market revs up again.

Keep it in the family

A noteworthy alternative to this, in addition to more familiar MBOs and MBIs, is the so-called VIMBO — the vendor-initiated management buyout, where the business owner effectively acts as the venture capitalist, while taking cash out of the business and passing it on to the next generation.

Through a VIMBO, a business may be sold to a family member using part cash (funded by the business) and part vendor loan notes. Loan notes are essentially an IOU which the business issues to the seller. The IOU is paid off over time through the profits of the business and, once fully paid, the business will pass to the next generation.

A VIMBO can be tax efficient for the seller, cheaper than private equity or a bank loan and can generate high yields. The transactional risk is low because the seller continues to be involved in the business and is incentivised to ensure its success.


If you are thinking about selling your business and want advice on the available options, speak to Brian Livingston on 020 7131 4914 or email brian.livingston@smith.williamson.co.uk


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