Borrowing To Fund an MBO/MBI

Raising the cash with which to buy a business can be a large and daunting task but there are really only four main sources of money to consider, equity, loans, grants and credit from the seller. And the extent to which you are able to borrow against the assets being bought will determine how much funding you will need from other sources to complete the deal.

It is important to remember that the funding sought needs to cover not only the purchase price including clearance of any debt to be satisfied as part of the deal, but also the working capital required to trade the business after completion, and any investment required to develop or restructure the business after the purchase. After all, it is no good buying the business only to find that you do not have the cash with which to run it. So you will need to work closely with your advisers to ensure that your financial projections are robust and that you raise sufficient funding to see the business through as well as ensuring you comply with the legal requirements of borrowing against a business's assets.

Money raised by way of loans against assets will comprise a 'structured finance' package of borrowings against property by way of commercial mortgage, (or bridging loan if a transaction needs to be carried out quickly) or sale and leaseback, plant and machinery by way of sale and leaseback, and debtors and sometimes stock by way of a factoring or invoice discounting facility.

Providers of this type of debt funding include the banks, which will have a range of financing products, and don't forget that you will need a trading bank account anyway but banks are however unlikely to want to fund such deals by way of overdraft facilities.

'Structured' or 'Package' lenders, are invoice discounters who are also able to offer financing against property and/or plant and machinery, as well as in some cases stock. While such funders are key to many successful MBO/MBIs, some limit their overall exposure in any deal to a certain percentage of debtors, such as 150% of the debtor book, which can limit the ability to raise funds from other assets.

There are also stand alone independent specialist funders, which focus on providing finance against any one particular class of asset, such as a factor or invoice discounter to cover debtors, a building society to lend on the property, and an asset financier to cover the plant and machinery. By using a mix of funders to maximise the borrowings against each type of asset, you can then maximise the total funding raised through borrowings and reduce the requirement for equity.

Where you own commercial property, generally 70% of the open market value (OMV) can be raised through a mortgage (or by using a bridging loan if funding is required quickly or where the transaction does not fit mainstream lending criteria), while 100% of OMV can be obtained (or more where valuations have been conservative) by way of a sale and leaseback, reducing the requirement to fund part of the property out of equity.

Where a business has significant plant and machinery, 70% to 100% of its value can be raised by a 3to 5 year sale and leaseback deal.

An advance of up to 85% of the available debtor book, which is to say those debtors of the right type, under 90 days old, up to credit limits and so on, should be available. In some cases you can achieve an advance of over 100% against your debtor book where a funder is prepared to take into account the value of your finished goods stock.

Your professional advisors or brokers should be able to pull together an appropriate package of funding from these types of sources for your transaction. The key information they will need to establish how much debt funding can be obtained for an acquisition are details of:

* The deal, the type of sale, a share purchase or business and assets, the purchase price, the expected working capital requirements following sale and the funds coming in from other sources by way of equity from a VC or the buying team, grants or vendor financing by way of deferred consideration or an earn out.

* The business, which sector it is in, its trading history and performance including the last three years accounts, its forecasts with underlying assumptions and details of any turnaround plan if it is in difficulty.

* The management team including CVs and statements showing their net worth.

A full description of any property involved, including any recent valuations if available, and notes on any environmental or contamination issues.

* Valuations, or if not, an asset listing with sufficient information regarding machinery make, model, age and condition to allow a desktop valuation, of all plant and machinery together with outstanding HP and lease liabilities.

Aged debtor lists, aged creditor lists and a package of sample sales order, delivery and invoicing documentation, as well as finished goods listings.


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Mark Blayney trained with PwC and now runs specialist SME financing advisers The Debt Boutique. He is an accredited business turnaround professional and author of Buying a Business and Making it Work, Raising Finance For Your Business, Turning A Business Around and Factoring and Invoice Discounting, a business guide. For expert advice on raising the cash for buying a business contact Mark at:
http://www.markblayney.co.uk