Succession planning is often the first instance that a business owner has ever had to consider selling a business, of which many will have close ties and affiliations. While all business transactions are important, the personal nature of these types of management buy-outs make it even more crucial to have the right team on board – in terms of buyer, advisor, but also the lender funding the transaction.
Experience and a strong track record makes all the difference here, which is why lenders like BOOST&Co, (which took second place in the list of top 20 debt providers in Experian’s latest Q4 2021 M&A report) are well-positioned to offer advice to business leaders considering a sale.
Your buyer’s lender will want to see a robust business plan and financial model, so ensuring that this information is readily available will keep the process smooth and swift.
Internal management information packs that include financial performance are perfectly suited for day-to-day operations, but often fall short of what a lender will require to accurately model their growth loan and ensure the business can support repayments.
The most important evidence that a business can produce is an integrated financial model that includes a profit and loss statement, balance sheet and cash flow statement. It should also include two years’ historical financial statements and a year-to-date trading period with a visible pipeline, as well as the next three years’ forecast.
Initially this may seem like a big exercise, but presenting your business in an organised and coherent manner will ensure that the maximum value can be achieved for an exit, while minimising execution risk.
Determine the right level of risk
Be prepared to ask your buyer for a breakdown of how they will fund your exit. There are typically three components that finance the total paid to the seller; equity, debt and seller roll-over (where the seller retains a percentage shareholding in the business post-sale).
- Management buy-out/buy-ins have the lowest equity contribution and therefore require the highest amount of debt, increasing long-term risk if the seller undertakes an element of roll-over
- Trade sales can be considered the middle ground, with a conservative balance between equity and debt used to finance the deal
- Private equity has a larger equity contribution than management buy-out/buy-in, although there is a preference for a greater proportion of debt financing to support targeted returns
Each approach must be assessed based on the buyer’s ability to raise both equity and debt in the appropriate timescale and if seller roll-over forms part of the deal, you need to ensure that you are aware of the risk and limitations imposed by the business plan and financing structure.
At BOOST&Co, all our facilities are interest-only for 12 months, giving the new business owners the freedom to focus on executing their plans, rather than on loan repayments, but not all lenders will take this approach.
Both the buyer and lender will conduct their own due diligence processes and will likely need a significant amount of management time to ask questions about the business model and any additional findings. The extent of this process varies deal-by-deal, but setting time aside for senior management to respond to these enquiries prevents any delays to the process.
A buyer may well pull out of the process if they cannot sustain momentum in developing their understanding of the business, or worse, the business becomes too distracted by the sale process and long-term damage is sustained.
BOOST&Co uses a layered approach, where each deal team consists of three members, with different overarching responsibilities. This ensures that processes are run in parallel and can be flexed to meet management capacity.
While you cannot stipulate which lender your buyer works with, if you have accepted an offer that includes deferred consideration (a contractual time-bound payment post-completion) or an earn-out consideration (a contractual performance-bound payment post-completion), it is important to understand how a lender’s debt facility may restrict that payment.
Most lenders will typically require three covenants and while these vary on each transaction, they can include debt servicing, leverage, interest cover, maximum gearing, minimum net tangible assets, restrictive covenants, or cash sweeps.
BOOST&Co does not typically require financial covenants within the term of a loan, giving business owners greater flexibility on how they run their business and ensuring that outstanding considerations owed to the seller remain unaffected by how the transaction was funded.
Ask the experts
These are just some of the factors to consider when looking to sell your business, but if you are serious about succession planning, it is always best to speak with experts that can offer you tailored advice.