Sterling Corporate Finance Column: New book highlights the impact of the credit crunch on MBIs
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IN the third and final extract from his forthcoming book, How to Sell Your Business, Andrew Rose, partner with Sterling Corporate Finance, examines how to find a buyer for your business, and recommends widening your search beyond the obvious suspects. When a vendor commits to selling his business he will probably have some buyers in mind. Typically, they will be direct competitors who are believed to be acquisitive, plus those who have made an unsolicited approach. The reality is that the potential buyer pool is substantially bigger. In addition to trade competitors there could well be trading companies who are seeking to enter the market to gain new income streams, private equity firms who are seeking to back good management teams, not forgetting high net worth individuals. There may well be interest from overseas companies. The key to identifying potential buyers is to have a good understanding of the key attractions of a business so that research of potential buyers can be undertaken in a meaningful way and a proper assessment made as to why they may be interested in acquisition. Proper research is more than just identifying potential buyers. It is about making an assessment of a purchaser’s acquisition appetite, understanding their strategic rationale, assessing their ability to complete an acquisition and most importantly their ability to fund the acquisition. The credit crunch has added an extra dimension to the assessment process; the key question now is has the buyer got the financial resources to fund an acquisition? Pre credit crunch the banks would fund corporate acquisitions by lending a sum equivalent to a multiple factor of the business’s annual operating cash flow (using earnings estimated as before interest and tax – ‘EBIT’). Multiples of three to five times EBIT were common practice and the banks were keen to lend. The banks still talk of lending on this basis but the lending multiple is significantly lower and the credit approval process is much more stringent. The credit crunch has also had another significant impact on the potential buyer pool. The potential buyer pool has changed. Prior to the credit crunch, many businesses were sold to management buy-in (MBI) candidates who funded their acquisition with bank debt. In today’s economic climate banks will not fund such transactions as they are deemed too high a risk. The principal reason for this is MBIs were usually undertaken by individuals with relatively little personal equity and the banks do not wish to be lender of first resort if the business has subsequent cash flow problems. It is an interesting fact that the majority of buyers of businesses for whom Sterling Corporate Finance has acted were not known to the vendors at the start of the process. Good research coupled with extensive contacts is key to identifying a broad church of interested parties and ultimately the purchaser of the business. How to Sell Your Business by Andrew Rose, will be published in spring 2011 (Great Northern Books). To request a copy, email info@sterlingcf.co.uk . For more information about Sterling Corporate Finance, visit www.sterlingcf.co.uk More articles in
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