Funding a management buyout?
Discussion
My BIL has managed a small engineering company for the past 10 years since the owner died leaving his widow as majority shareholder, although she takes no active role in the day-to-day business.
The company consistently turns over approx. £2.5M with £150-£200k net profit after tax.
He owns 20% of the shares which gives him a share of profits via dividends. She has decided sell up and has had an offer for just under £1M from a competitor.
Because he has Class B shares he’s not entitled to any payment unless the company sells for more than £1.4M meaning he would get nothing and then would move from benefiting financially from the success of the company he manages to being another employee of the new much larger group.
He would like to buy out the other partner but the timescale she is aiming for payment would mean the business would be starved of cash so he is unsure how to go about financing this over a longer term? Are there specialist companies who deal with this kind of thing as a google search brings up mostly generic lenders or ones who seem to be geared towards larger value sales.
The company consistently turns over approx. £2.5M with £150-£200k net profit after tax.
He owns 20% of the shares which gives him a share of profits via dividends. She has decided sell up and has had an offer for just under £1M from a competitor.
Because he has Class B shares he’s not entitled to any payment unless the company sells for more than £1.4M meaning he would get nothing and then would move from benefiting financially from the success of the company he manages to being another employee of the new much larger group.
He would like to buy out the other partner but the timescale she is aiming for payment would mean the business would be starved of cash so he is unsure how to go about financing this over a longer term? Are there specialist companies who deal with this kind of thing as a google search brings up mostly generic lenders or ones who seem to be geared towards larger value sales.
quote=TownIdiot
Is there anything that can act as collateral for a secured loan? The business is showing just over £500k of assets plus he owns his own home outright. He also has £150k in cash of his own money.
If not would she accept more money over a longer period of time? No because the other offer is payment over 4 years and the £250k pa that she wants would stifle the company's cash flow
If she's not up for negotiation then it's probably time to go through the shareholder's agreement with a fine toothed comb. He has, he went to a solicitor last week when he found out she was selling. He's been shafted because he naïvely signed the agreement based on trust.
She initially didn't want to sell to him and had tried to do it behind his back, but he met with her yesterday and pointed out that there is no company to sell without him as he is the one who's been managing every aspect of the business and the clients are effectively HIS customers whom he has a personal relationship with. Although he can't easily leave and go alone as there's a 12 month non-compete clause
Is there anything that can act as collateral for a secured loan? The business is showing just over £500k of assets plus he owns his own home outright. He also has £150k in cash of his own money.
If not would she accept more money over a longer period of time? No because the other offer is payment over 4 years and the £250k pa that she wants would stifle the company's cash flow
If she's not up for negotiation then it's probably time to go through the shareholder's agreement with a fine toothed comb. He has, he went to a solicitor last week when he found out she was selling. He's been shafted because he naïvely signed the agreement based on trust.
She initially didn't want to sell to him and had tried to do it behind his back, but he met with her yesterday and pointed out that there is no company to sell without him as he is the one who's been managing every aspect of the business and the clients are effectively HIS customers whom he has a personal relationship with. Although he can't easily leave and go alone as there's a 12 month non-compete clause
Does the £1M over 4 years include earn out targets or is it a guaranteed £250K PA regardless of how the business performs? If there is an earn-out target then its surely in the sellers best interest to keep your BIL in the company because if he leaves then the seller will only potentially get one payment.
I don't know however the potential purchasers have said that without him there's no deal anyway. As i said in my previous post, she tried to do all this behind his back. It's only because he is well known in the industry that the purchasers contacted him last week to confirm that he was happy with the deal before they progressed any further.
He isn't happy at all which is why he'd like to try and purchase the business himself.
He isn't happy at all which is why he'd like to try and purchase the business himself.
4Q said:
quote=TownIdiot
Is there anything that can act as collateral for a secured loan? The business is showing just over £500k of assets plus he owns his own home outright. He also has £150k in cash of his own money.
If not would she accept more money over a longer period of time? No because the other offer is payment over 4 years and the £250k pa that she wants would stifle the company's cash flow
If she's not up for negotiation then it's probably time to go through the shareholder's agreement with a fine toothed comb. He has, he went to a solicitor last week when he found out she was selling. He's been shafted because he naïvely signed the agreement based on trust.
She initially didn't want to sell to him and had tried to do it behind his back, but he met with her yesterday and pointed out that there is no company to sell without him as he is the one who's been managing every aspect of the business and the clients are effectively HIS customers whom he has a personal relationship with. Although he can't easily leave and go alone as there's a 12 month non-compete clause
Has he got specific advice on the non-compete?Is there anything that can act as collateral for a secured loan? The business is showing just over £500k of assets plus he owns his own home outright. He also has £150k in cash of his own money.
If not would she accept more money over a longer period of time? No because the other offer is payment over 4 years and the £250k pa that she wants would stifle the company's cash flow
If she's not up for negotiation then it's probably time to go through the shareholder's agreement with a fine toothed comb. He has, he went to a solicitor last week when he found out she was selling. He's been shafted because he naïvely signed the agreement based on trust.
She initially didn't want to sell to him and had tried to do it behind his back, but he met with her yesterday and pointed out that there is no company to sell without him as he is the one who's been managing every aspect of the business and the clients are effectively HIS customers whom he has a personal relationship with. Although he can't easily leave and go alone as there's a 12 month non-compete clause
Has he spoken to the potential buyers? Without him on board, many buyers would run a mile if there's a large amount of goodwill attached to someone not aligned to the sale.
4Q said:
I don't know however the potential purchasers have said that without him there's no deal anyway. As i said in my previous post, she tried to do all this behind his back. It's only because he is well known in the industry that the purchasers contacted him last week to confirm that he was happy with the deal before they progressed any further.
He isn't happy at all which is why he'd like to try and purchase the business himself.
Is it worth him having a beer with the potential purchaser? He’s likely an important part of the deal, maybe they will want to incentivise him. He isn't happy at all which is why he'd like to try and purchase the business himself.
4Q said:
I don't know however the potential purchasers have said that without him there's no deal anyway. As i said in my previous post, she tried to do all this behind his back. It's only because he is well known in the industry that the purchasers contacted him last week to confirm that he was happy with the deal before they progressed any further.
He isn't happy at all which is why he'd like to try and purchase the business himself.
If he's not willing to remortgage/use his spare cash, he needs to get himself tied into this deal with some equity.He isn't happy at all which is why he'd like to try and purchase the business himself.
[quote=MaxFromage]
Has he got specific advice on the non-compete? - solicitors reply - 2. The restrictive covenants in the shareholders’ agreement are well drafted and likely to apply (albeit this will depend on a variety of circumstantial matters e.g. what business you were to set up, where it is to be created, which staff joined your business
Has he spoken to the potential buyers? Without him on board, many buyers would run a mile if there's a large amount of goodwill attached to someone not aligned to the sale - they've said no deal without him.
Has he got specific advice on the non-compete? - solicitors reply - 2. The restrictive covenants in the shareholders’ agreement are well drafted and likely to apply (albeit this will depend on a variety of circumstantial matters e.g. what business you were to set up, where it is to be created, which staff joined your business
Has he spoken to the potential buyers? Without him on board, many buyers would run a mile if there's a large amount of goodwill attached to someone not aligned to the sale - they've said no deal without him.
Austin_Metro said:
4Q said:
I don't know however the potential purchasers have said that without him there's no deal anyway. As i said in my previous post, she tried to do all this behind his back. It's only because he is well known in the industry that the purchasers contacted him last week to confirm that he was happy with the deal before they progressed any further.
He isn't happy at all which is why he'd like to try and purchase the business himself.
Is it worth him having a beer with the potential purchaser? He’s likely an important part of the deal, maybe they will want to incentivise him. He isn't happy at all which is why he'd like to try and purchase the business himself.
I'm not sure exactly how they refer to themselves, but there are definitely boutique specialist lenders who deal with 'unconventional' requests like this.
Best one I could recommend would be Millwood Finance, ask for Mick 0870 084 4044. Old school businessman who has helped me with some similar difficult financing requirements
Best one I could recommend would be Millwood Finance, ask for Mick 0870 084 4044. Old school businessman who has helped me with some similar difficult financing requirements
4Q said:
I don't know however the potential purchasers have said that without him there's no deal anyway. As i said in my previous post, she tried to do all this behind his back. It's only because he is well known in the industry that the purchasers contacted him last week to confirm that he was happy with the deal before they progressed any further.
He isn't happy at all which is why he'd like to try and purchase the business himself.
Well there we have the answer.He isn't happy at all which is why he'd like to try and purchase the business himself.
"Without him there is no deal"
Tell the purchasers he will walk unless he gets something acceptable then see what their offer to the main shareholder is.
Selectively quoting some key facts:
If she would continue to receive dividends over those four years, then the ideal scenario would probably be to borrow £600k, and use that plus his £150k and the £250k from mortgaging his house to buy her out straight away, then pay back the £650k loan from the profits over, say, six years.
He should talk to the company's bank.
4Q said:
The company consistently turns over approx. £2.5M with £150-£200k net profit after tax.
The business is showing just over £500k of assets plus he owns his own home outright. He also has £150k in cash of his own money.
He owns 20% of the shares which gives him a share of profits via dividends. She has decided sell up and has had an offer for just under £1M from a competitor [with] payment over 4 years...
I'd be curious to know whether she would continue to receive dividends over the four years... If not (and assuming he could raise £250k by mortgaging his house), he might be able to buy her out on a similar schedule by using his own money plus the company's profits. The business is showing just over £500k of assets plus he owns his own home outright. He also has £150k in cash of his own money.
He owns 20% of the shares which gives him a share of profits via dividends. She has decided sell up and has had an offer for just under £1M from a competitor [with] payment over 4 years...
If she would continue to receive dividends over those four years, then the ideal scenario would probably be to borrow £600k, and use that plus his £150k and the £250k from mortgaging his house to buy her out straight away, then pay back the £650k loan from the profits over, say, six years.
He should talk to the company's bank.
MadCaptainJack said:
I'd be curious to know whether she would continue to receive dividends over the four years... If not (and assuming he could raise £250k by mortgaging his house), he might be able to buy her out on a similar schedule by using his own money plus the company's profits.
If she would continue to receive dividends over those four years, then the ideal scenario would probably be to borrow £600k, and use that plus his £150k and the £250k from mortgaging his house to buy her out straight away, then pay back the £650k loan from the profits over, say, six years.
He should talk to the company's bank.
Or he could run the company and not pay her any dividends.If she would continue to receive dividends over those four years, then the ideal scenario would probably be to borrow £600k, and use that plus his £150k and the £250k from mortgaging his house to buy her out straight away, then pay back the £650k loan from the profits over, say, six years.
He should talk to the company's bank.
What's she going to do?
MadCaptainJack said:
I'd be curious to know whether she would continue to receive dividends over the four years... If not (and assuming he could raise £250k by mortgaging his house), he might be able to buy her out on a similar schedule by using his own money plus the company's profits.
If she would continue to receive dividends over those four years, then the ideal scenario would probably be to borrow £600k, and use that plus his £150k and the £250k from mortgaging his house to buy her out straight away, then pay back the £650k loan from the profits over, say, six years.
He should talk to the company's bank.
They haven't discussed the detail yet as she was on holiday until Saturday which is why the first meeting he had with her was yesterday morning. she asked him to produce a business plan/proposal by Friday.If she would continue to receive dividends over those four years, then the ideal scenario would probably be to borrow £600k, and use that plus his £150k and the £250k from mortgaging his house to buy her out straight away, then pay back the £650k loan from the profits over, say, six years.
He should talk to the company's bank.
MaxFromage said:
It all depends who the directors are... OP?
They're both directors. She has access to the bank, etc, and she is the one as major shareholder who decides what dividends to pay.I've told him that he holds all the cards here as neither she nor the prospective purchasers have anything without him. His biggest issue is that he's a really straightforward nice guy and he wants to do the right thing as he was good friend's with her husband (his original boss). Even before he died he was running the company for the 3 years whilst he was too ill.
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