HOW DO YOU RAISE CASH?

To raise cash externally you will need to prepare some form of

business plan and cashflow forecasts (but it is worth checking when you need to consider the possibility of raising cash internally). While doing so, bear in mind the banker’s CAMPARI checklist as you will need to satisfy this for almost any external lender or investor.

Character

Will the investor or lender see you as honest, do they trust your integrity and reliability, or have you made exaggerated claims in the past?

Ability

Do you and your management team clearly have the necessary skills and ability to run the business?

Means

How much are you worth (both as a guide to your past money making performance and your ability to provide cash to cover any short-term problems)?

Purpose

What are you intending to do with the money? Is it a feasible idea, that matches funding against the need appropriately? Are you also looking to do something that the investor or lender finds acceptable given its own policies (for example, the banks may not be interested in lending to businesses in your sector due to its internal policies)?

Amount

How much are you putting in compared with the risk you are asking the lender or other investors to take; and are you asking for enough to properly see the project through to completion?

Repayment/return

How long do you need the money for and how is it to be repaid (or what return is an investor going to make on their money)?

Insurance

What sort of security is available to cover the loan from:

• the business assets;
• you by way of a personal guarantee (PG) which may also be backed up by a charge over your personal assets (supported PG);
• or the Small Firms Loan Guarantee Scheme?

Additionally, many lenders will need you to take out insurance cover (such as key man life cover) as part of their assurance that their money is safe.

Alternatively, it is increasingly common for business sellers to arrange an indicative package of asset based finance with lenders (known as stapled finance) that a potential purchaser can take advantage of if they wish. The advantage from the seller’s point of view is that this helps the sale process along by removing one element of uncertainty. How much the buyer can raise by way of debt against the business assets has already been decided. From the buyer’s point of view this also means that they then only have to concentrate on raising the equity element.

VENDOR FINANCE

A business for sale will typically have been valued at a multiple of its annual earnings. This can easily mean that even a relatively small business may come with a target purchase price of many hundreds of thousands of pounds.

This is, however, a problem for both you as a buyer and the seller, as you or any other buyer will only be able to afford to pay the amount of cash that you are able to raise. Not many people actually have hundreds of thousands in cash available with which to buy a business, even having taken into account the amount you may be able to raise from remortgaging your domestic property; while the funds that can be raised against the business’s assets may be limited as shown by the percentages given above.

This means that the only realistic source of payment to the seller for much of the business’s goodwill is likely to be from the future profits generated by the business under your new ownership. But because this does not provide any realisable form of security, you are unlikely to be able to borrow against this from banks or other lenders apart from the seller.

So sellers who are not prepared to allow you some degree of credit (vendor finance) are in effect reducing the amount of money they can be paid for the business.

In allowing credit they are, however, taking a risk that they will not be paid this deferred consideration, and so will want to look to cover themselves by charging interest and taking security.

Bonding solution

There is a solution to this problem for business sales with a value in excess of £2m as there is now a service available backed by a major institution which will guarantee payment of up to 100% of the deferred consideration to the seller by way of an insurance policy. This bonding approach therefore eliminates the seller’s risk in offering such credit, covering up to 100% of vendor consideration of £2m-£50m in transactions of £2m-£250m, with deferred consideration periods of up to five years.

The policy is non-cancellable and 100% underwritten by an investment grade backer with very limited exclusions covering vendor fraud or deliberate misrepresentation. It can also be combined with raising asset based finance against the business’s assets to fund payment of the premium.

This approach has benefits that can be shared by both you and the seller:

• the seller can have confidence that they will receive their payment whether or not the business is a success;
• the seller does not have to take further security and the phasing of payments can give tax planning advantages; while
• agreement by you on the seller’s headline price is easier to achieve; and
• you can reduce the level of gearing needed to buy the business, reducing the financial burden on the business and the risk of failure.

Price structuring

How you structure the purchase price can also have a large impact on the amount of cash you will need to raise.

• In an earn out, the final value to be paid for the business is determined in part by the way the business performs in a period after the sale. This type of arrangement will therefore affect both the total amount you have to pay, but also its timing, as the impact will be to delay part of the consideration at least until some time after the transaction has completed.
• Consultancy agreements can be used to retain the old owner’s involvement in the business as a way of obtaining a controlled handover. Again, making part of the purchase price payable by way of such an agreement can be a way of deferring part of the total cost over the period of the consultancy arrangement.

Alternatively, a seller may be willing to take shares in your business as part or all of the payment, which again obviously reduces that amount of cash you will have to raise. However, this is only usually practical where your shares are listed on a market such as Ofex or AIM on which they can rely to be able to sell again in order to obtain cash.

FINANCIAL ASSISTANCE

In many business sales you will be acquiring significant business assets such as land and buildings or plant and machinery against which, as discussed above, you would expect to be able to borrow. And indeed, if the value of these assets forms a significant part of the value of the business this would appear to be one of the most logical routes to raising the money with which to buy them.

The Companies Act

However, this is to reckon without the vagaries of British company law, where to borrow against the assets being purchased is actually normally against the Financial Assistance rules of the Companies Act.

These rules prohibit you from pledging the assets of the company to be bought as security to a lender for money to be raised to buy the company’s shares. These provisions were designed to prevent asset stripping, where a company with significant assets could in the past be bought by someone with money raised from financial institutions on the basis that the business would be broken up and the assets sold off as soon as the deal had been completed, with the proceeds used to repay the borrowed money.

In practice, the Act provides a mechanism whereby so long as certain procedures are met, you can borrow against the value of the assets being acquired in order to fund the deal. You will, however, need to instruct professional advisers, who will be required to prepare what is known as a whitewash report to allow the borrowing to take place.

For a whitewash report the target company’s directors have to swear a statutory declaration that the business will be able to meet its debts in the year following the sale and this declaration has to be confirmed by the business’s auditors.

The Companies Act also imposes restrictions on the sale of substantial business assets from the business to the directors (designed to prevent directors looting the company’s assets without the knowledge of the shareholders). The effect of this is that if you are a director and you wish to buy either substantial assets (in effect anything with a value of over £100,000 or 10% of the balance sheet) then under Section 320 of the Companies Act, the transaction requires the approval in advance of the shareholders. This has obvious implications if, for example, you are looking to undertake a management buy out of part of your existing business.