In this article, Chris Griffiths, New Investments Fund Manager at Development Bank of Wales looks at how management teams can secure the funding to buy a business.
It still surprises me when I hear of capable management teams who don’t take up the opportunity to buy the business they’re working for when its owner decides to sell up and move on. Many of these teams know the business inside out and they also have firm views on how they’d take it forward.
Selling a business to its existing management team is often an attractive option for the business owner, so why aren’t more management teams taking the plunge? While a lack of confidence could be one reason, I wonder how many management teams are put off because they think they can’t afford to buy the business.
What are your potential funding options?
In my experience this is quite a common misconception and as a fund manager at Finance Wales, thinking about the ‘art of the possible’ is something I do a lot – especially when it comes to helping ambitious and capable managers secure the funding to buy a business.
Banks or investors like Development Bank of Wales can often come up with the lion’s share of the finance needed, leaving the management team to cover a relatively small portion of the funding they require.
If the management team are still left with a funding gap, it’s not the end of the story. There are a number options worth considering:
Leveraging fixed assets
Raising finance against fixed assets can be an effective way to secure additional funding. Stock that’s easy to sell will always be attractive to asset-based lenders and plant and machinery is also an option, especially if it is bespoke or has recently been upgraded.
Leveraging a business’ debtor book/invoices
Some banks and specialist funders will provide funds against current and future invoices. While this can be a useful way of unlocking finance, it’s worth taking a longer-term view as you could be left with little headroom should revenues dip once you’ve taken over.
Property costs invariably bump up the price of a business, but if they’re taken out of the equation, you can reduce the price. Leasing back premises will not only make the deal easier to fund, but it will also leave the current owner with a monthly income.
Focus on the ‘art of the possible’
So with an open mind, positive attitude and a clear focus on the ‘art of the possible’, could 2016 be the year you achieve your goal of owning and running your own business?
Development bank of Wales has a range of funding for small and medium-sized businesses including a specialist £25 million fund, The Wales Succession Management Fund to help Welsh managers and management teams buy established Welsh small and medium-sized businesses (SMEs).