In the third of our series on buying a business out of administration, we look at the options for funding the transaction.
Speed is essential in all aspects of buying from administrators, as has already been stressed in our previous articles. It is vital that you pick finance partners who understand this and can commit to completing a transaction in a matter of weeks. It is also vital that the funders understand the process of buying from administrators and that warranties will not be offered as to the state of the business.
Mainstream may not be the way to go, particular if incumbent management is looking to buy. The main clearing banks have traditionally been reluctant to back management teams in buying a business out of administration and will not provide a cash flow lend to support such a transaction. Buyers should be willing to consider specialist or alternative lenders to fund the deal. Trade buyers can often secure an advantage in bidding by using their own existing facilities and by leveraging the existing collateral to raise funding.
Have early evidence of funding to get into the process. This is particularly key for management teams looking to undertake an MBO, where they will not have the ability to leverage existing business to raise funding (other than what can be leveraged from the target’s balance sheet). It is crucial that management can convince the administrators of the availability of funds early on to have a chance of being considered as a bidder.
Vendor assist may be possible, but will not be the most attractive bid. Structuring a deal with a level of ‘vendor assist’, where part of the purchase price is paid over time, may be a possibility. In making an offer on this basis, it is important to bear in mind that administrators will be looking for as much certainty as from the transaction as possible. Administrators are likely to favour cash bidders, unless the vendor assist element will deliver a significantly better return and is appropriately secured. It is also important to bear in mind that administrations will typically last for a 12 month period. Deferring consideration for more than 12 months may therefore not be attractive to administrators, as it will require them to keep the insolvency open for longer than usual.
Consider Asset Based Lenders, who should be able to move swiftly and leverage against the target business’ assets. Many invoice financers will be willing to lend against the book debts of the target’s business and should be able to proceed quickly off the back of an audit of the debtor book. Administrators will often be willing to sell book debts at a discount to achieve certainty of realisation, making invoice discounting an attractive route to finance the purchase of the book debts and other assets of the business. Asset based lenders will also be able to provide finance against physical plant and machinery (if applicable). Traditional mortgage finance may be an option if the target owns freehold property.
If seeking equity funding, speak to specialist funders. Most private equity houses will be reluctant to back a purchase from administration. These funders typically require a full due diligence investigation before committing to investing in a target, which will not be possible in the timescales for a purchase from administrators. There are, however, specialist private equity investors who are both willing to back a purchase from administration and able to run at the speed required to do so.
Follow these links to access our previous articles on Reasons to buy for an Administrator and Buying from an Administrator – Issue to be aware of .
