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Management buyout financing and acquisition funding are all about successfully engineering and executing on the finance solution - and we can pretty well guarantee our clients that ' one size doesn't fit all '! Let's dig in.
WHAT IS A BUYOUT? HOW DO BUYOUTS WORK?
These opportunities also aren't always coming up so the ability to buy a firm you're associated with or to capitalize on a business opportunity is often associated with the right timing. Funding for a management buyout is one of the more common methods of owners exiting a business. Never have the words ' skilled management team ' meant more when it comes to the management buyout and purchase of a business. Both the resources of the company and capitalizing on leverage in a positive manner, allows you to use company assets as a portion of the collateral. Seller financing and external funding will often complete the transaction.
Most of the time, the management team takes full control and ownership, using their expertise to grow the business. An MBO/LMBO acquisition, which can be sizable, is usually funded by a mix of personal investors, external financiers and the seller, thereby completing this financing for control by management.
Lenders are often very comfortable with management buyouts " MBO's " given current management is experienced and understands the true operations of the company. An ' MBI ' (management buy-in )is not dissimilar, its simply the purchase of a company, often by external managers in the same industry.
Buyouts done well should be focused on a smooth transition to the new owner/owners. Numerous advantages come out of management buy outs, even when they are leveraged, as clearly new owners have already managed the company - that clearly reduces risk and the risk of employee departure would seem to be significantly reduced. In most cases the buyout can be a low key manner with less risk of being a concern to suppliers, unsecured lenders, and, most importantly, customers!
There should be careful planning around a logical process to move forward with the sale. First and foremost a proper business valuation must be considered and agreed upon in the context of a new shareholder agreement if there is more than one buyer. Now is the time to be thinking about and assessing who a logical ' senior lender ' might be on your transaction. It is essential to know your business financing and new capital structure will not impede growth plans in the newly acquired entity. Knowing you will have financial support on the transaction is obviously key.
A proper timeline should also be established, as in some cases there is an earn-out agreement between the owner and the new buyers. Whether non-financial business folks like it or not there has to be consideration given to issues such as taxes and related succession issues.
New buyers, having been management or closely aligned to the firm should be able to determine future profit generation and what type of financing will be needed for working capital and cash flow needs in the company buyout . This may well be the time to consider some form of downsizing of employees, assets, etc., as regrettable as those latter two issues might be. It is easy for your deal to get ' stuck ' on a myriad of non-financial matters relating to staff, clients, go-forward strategies, and of course the ever-important ' valuation '.
BUSINESS VALUATION / WHAT IS THE BUSINESS WORTH?
Purchasers need expert help if they are not qualified to come up with a problem valuation on the management buyout. Suffice to say that business owners always have a figure on what they think their business is worth! They tend to have some ideas on the value of your company target in the business valuation process.
Valuing the business can be explained as a combination of art and science as many experts say, let alone the human nature aspect of optimism of current owners. There are several ways in which you can tackle the job of addressing the value and the financing of that value - here also is the time to consider a help of an experienced Canadian business financing advisor . Formal business valuations can also be purchased - they are costly but certainly might make sense on larger transactions.
Business valuations will always take into consideration some basic issues - they might include profit generation, future growth potential, and the overall asset mix on the balance sheet.
Different outcomes arise based on the method of value you are looking at. If the business is currently generating good profits and solid return on equity those value measures are on top of the level of actual fixed assets. Your cash flow forecast as it relates to past results should be fundamental in your analysis. Having access to historical financial statements is key, as that allows for a ' smoothing ' of sales and earnings. In business, the past is not always predictive of the future.
The concept of using ' multiples ' is another reliable way of determining value. Key financial areas such as ' EBITDA ', sales, and cash flow can all be analyzed to determine a range in which a final cost can be substantiated.
EXAMPLE - Some industries are valued based on a multiple of sales - that number might be 2 . So a company doing 3 Million in revenue might include a value of 6 Million in its final valuation assessment. The key is to ensure you are comparing business multiples in the same industry! Here publicly available date may be very beneficial.
Hard assets play a key value in the final valuation summary. Many industries, as opposed to service industries, are very capital intensive. Businesses with high asset values sometimes generate lower returns on equity due to the nature of the company. In some cases appraisals might well be undertaken to determine actual market and liquidation value, and there will sometimes be major differences in these two numbers.
Every business based on its financing structure can handle only so much debt - a typical rule of thumb in many industries is that a debt to equity ratio of 2:1 is optimal. Still, every industry is different as some might be very capital intensive. The amount of debt your firm carries as well as how it finances cash flow will ultimately affect sales volume growth and the potential for the firm to grow substantially.
As initial planning of the takeover proceeds a business plan should be developed, which has uses for both the owners from a planning perspective, but more so for lenders. Cash flow growth should be realistic and conservative - this is not a marketing document of the time for a ' hockey stick' growth curve for sales projections.
At 7 Park Avenue Financial our business plans for clients include management overview, industry overviews, cash flow projections, and many other vital aspects of what lenders are looking for in a plan. Those details ensure acquisition funding success.
In some cases in a shareholder buyout the owner might agree to a seller financing aspect to the transaction - this is usually well received by lenders who now know the seller has confidence in the management team to take the company forward successfully.
In some cases you might be looking at purchasing a franchise directly from the franchisor, or perhaps a current owner who wishes to sell. The Canadian franchise industry can only be called explosive and it plays a vital role in the economy of Canada. The ability to 'partner' with a franchisor successfully helps guarantee a good acquisition. Some very specialized financing can help complete such a purchase.
Let's examine some practical tips and strategies for getting ' unstuck ' on a transaction such as this.
Obtaining seller financials is key to any sort of management buy out or leveraged buyout. Key point: Many alternative finance solutions are available to buy a business, but they rely on a decent level of financial transparency on how the company is doing, what the actual value of assets is, etc. The ability to distinguish between internal and external financials, as well as obtaining current interim financials is critical. At 7 Park Avenue Financial we have seen examples whereby senior lenders insisted on seller financing as a part of the owner exit strategy to show all parties have a commitment to the deal.
Purchasers and your financiers will want a proper representation of specific assets and liabilities on the balance sheet. Great care should be taken in qualifying key assets such as accounts receivable... from a simple point... are they collectible?!
Naturally there is no guarantee that any existing or future A/R item will in fact be collectible, and no one is going to guarantee that for you. Some reliable credit checks on the quality of the A/R base is highly in order, as well as looking at historical payment trends of the client base. You also want to ensure there is no right of set off against the receivables, and it is certainly not uncommon for us to see the A/R as often the most significant asset on the balance sheet.
An excellent strategy for Purchasers contemplating a leveraged management buyout funding is to make some sort of agreement on the ability to ' rejig ' the final price subject to A/R collectability. Naturally, owners of the company might be reluctant to do that.
Is there anything trickier than ' inventory ' with respect to classifying quality and the actual value of inventory, which might, of course, be raw materials, work in process, or finished goods. Make a solid effort to quantify the quality of the inventory you are purchasing for issues such as obsolescence.
Plant and equipment should always be appraised in some manner on funding a management buy in. This quite frankly protects all parties, and we urge clients to complete an appraisal that includes some component of fair market value, orderly liquidation value, and forced liquidation. Those numbers will vary significantly in any appraisal and play a key role in the way in which assets are financing in a real management buyout. It goes without saying of course that the purchaser should ultimately be comfortable with the quality and condition of the fixed assets on the balance sheet they are contemplating financing.
Don't forget also to look at any leases or contracts that might be in place via the current business owner. You will want to make sure these are assignable to yourself in the event of a completed sale.
How Then Is Acquisition Finance Most Commonly Achieved in Canada? Financing Management Requires Specialized Financing Expertise
Purchasers have a variety of options to consider for successful management buy outs. They should be expected to also ensure there is a personal equity component in the transaction, which typically might be in the 20% range, although that percentage varies greatly, especially when the deal presumes high leverage. That personal investment is viewed positively by your lenders, hence the popular saying ' skin in the game '. Some owners might well consider refinancing or selling some personal assets to augment the owner equity.
Naturally bank loans are very commonly the first ' go to ' by many purchasers, but alternative financing solutions are becoming extremely popular, given the rise of non-bank asset based lending solutions in Canada. Banks of course have the lowest cost financing re interest rates, which are at historic lows. In smaller transactions one key lender might be involved while on larger deals financing might need to be 'cobbled together ' with more than 1 funding source.
We have previously referenced vendor take backs, ' VTB's'. This ' seller finance ' strategy is highly flexible and can often be structured creatively re payback terms, rates, etc. The essence of seller financing is its ability to reduce the cost purchasers must pay for the business. Depending on how the deal is structured it also gives the seller some input until the VTB is terminated via final payout.
ESOP'S, namely employee ownership plans might also be a financing consideration for more sophisticated sales on larger firms.
Mezzanine financingis a natural complement to any senior lending facility and can bridge the financing gap. If a business can demonstrate good cash flow mezzanine debt finance should always be considered.The key benefit of mezzanine funding is that it will allow your other external lenders to consider more financing participation in your deal, especially when it comes to lbo financing where leverage is higher .
Some companies may wish to look at public market financing,or as an alternative, private equity but purchasers should recognize that these methods are time consuming and dilute ownership.
If there is a bottom line in management buyouts it's merely to ensure you consider all aspects of commercial business financing that might be available. It is critical for management to assess how operations will be funded on an ongoing daily basis.
HOW TO FINANCE A MANAGEMENT BUYOUT
Govt guaranteed loans - The Candian Government Small Business Loan program is an excellent way for smaller firms to be acquired, including franchise finance opportunities.
Asset Based Lenders - (' ABL ' ) These commercial finance firms offer day to day funding for operations and are non-bank in nature. Solutions include a/r financing to address the working capital financing component of the collection of your receivables. Solutions could consist of traditional ' factoring ', but at 7 Park Avenue Financial our recommended solutions include Confidential Receivable Financing, allowing you to bill and collect your accounts without a third party intrusion. 'ABL' is excellent when it comes to a leveraged management buyout. Business worth is not always the same as asset worth, and ABL expertise has a high value.
Inventories can also be financed as a part of an asset based line of credit solution that allows your firm to combine the financing power of a/r, inventory, and equipment into one borrowing facility. In almost all cases this delivers more cash flow than a bank facility, but is more expensive.
Purchase Order Financing has risen in popularity as more firms experiencing large new orders and contracts that otherwise might not be financeable is now possible. Direct payment to your suppliers is facilitated through this process.
Private Equity Funding- Private Equity funds typically raise money from large investors and acquire stakes in firms with a focus on improving operations through cost cutting and effective management. In Canada private equity deals tend to be for substantial transactions outside the normal MBO process
Canadian Commercial Chartered Banks - Banks are the ' go to ' for many businesses due to their attractive rates and tremendous capability in financial offerings. Many firms are unable to access bank financing because the banks have precise requirements around collateral and overall business qualifications required to get funding, including personal guarantees, outside collateral, and solid personal credit history.
Business Development Corporation Term Loans - The Government Of Canada's Crown Corporation non - bricks and mortar bank provides term loan financing for business acquisitions. Their subordinate financing solutions are very complementary to a deal.
SUMMARY OF BUSINESS FINANCE SOLUTIONS FOR A MANAGEMENT BUYOUT
At the end of the day funding for the purchase by management will depend on size of your deal, the reputation of the company in its industry, as well as the assets and cash flow that will propel the company forward.
Buyouts are becoming more popular these days due to generational succession. The current management of many firms is a logical way to ensure a company's history and reputation will continue. Even a leveraged buyout where a large portion of the company assets can be collateral when financed properly can guarantee the business moving forward.
Well executed mgmt. buyouts have a focus on future profitability and ensuring the right amount of financial leverage is being used. If financing costs will eat up all the cash flow productivity and sales growth might be impaired. Otherwise major cost-cutting will have to be initiated, never a good sign. Doing the right amount of financial analysis and utilizing outside help on cash and debt financing needs is vital.
Companies that are distressed or financially challenged can still be financed, but they are often only able to achieve financing via alternative finance means. Whether the company is doing well or is not still requires the new owners to ensure that too much debt is not taken on and operating financing on a day to day basis is fully available.
An excellent transaction occurs when you have a company that is both profitable and has key assets that are financeable, i.e. the receivables, inventory, and equipment we highlighted earlier. That isn't always the case, and as we noted, every business and industry is different. Speak to a trusted, credible, and experienced Canadian business financing advisor for assistance in funding the purchase and successfully completing your buy-in via leveraged funding.
7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
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7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.
Business financing for Canadian firms, specializing in working capital, cash flow, asset based financing, Equipment Leasing, franchise finance and Cdn. Tax Credit Finance. Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations.
Stan has had a successful career with some of the world’s largest and most successful corporations. He is an experienced
business financing consultant
.Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.
Stan has over 40 years of business and financing experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in-depth, hands-on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.
Stan Prokop
7 Park Avenue Financial/Copyright/2020
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