The recent problems with raising capital from the banking sector have had a particular impact on the ability of owners of SMEs (small to medium-sized enterprises) to exit their businesses and retire.
The typical buyers of such businesses are either members of the existing workforce or other SMEs. Neither of these groups tend to be ‘flush’ with their own cash resources, so they have historically relied heavily on bank borrowings to fund acquisitions.
The lack of bank funding has lead to a variety of innovative ways to structure such deals, but by far by the most common has been the increased use of ‘vendor funding’. Essentially this means the sellers of a business will not take all the consideration on day one. Instead they will leave a chunk of money in the business, either as deferred consideration or a loan (or even as continued shareholding in the business going forward).
Such a structure raises a variety of issues for both buyers and sellers which must be overcome for the transaction to work.
Of primary concern to the sellers is the security of the money they are leaving in. Personal guarantees, legal charges and debentures can all provide a degree of comfort, but have to work for both sides and be acceptable to any third party funders (such as banks).
Alongside the issue of security comes the issue of control. From a sellers’ point of view, they will still want some degree of say in what goes on in the business for as long as they are owed money by it. This must be balanced against the buyers’ need to have the ability to run the business as they wish. Usually, a sensible list of controls can be arrived at which allows the buyer to run the business, whilst at the same time giving the seller comfort that undue risks are not being taken with their money, or that assets are not being stripped out of the business.
In addition to the above, the tax implications of the structure must be taken into account by each party’s tax advisers.
In an ideal world, a clean break on a sale would often be the preferred approach. However, we are not living in ideal times and, as such, compromises have to be made, solutions found and effective means of managing the process to the satisfaction of all concerned have to be put in place.
As Mr Jagger would put it “You can’t always get what you want, but if you try sometimes, you just might find, you get what you need”.
Simon Morris is a solicitor and head of Raworths’ Corporate team. To contact Raworths telephone 01423 566666 or visit our offices at Eton House, 89 Station Parade, Harrogate, HG1 1HF. Alternatively, you can email Simon at Simon.morris@raworths.co.uk.
