More firms opting to self-fund deals says advisor

BUSINESS owners in the Midlands are rejecting offers of bank finance and choosing to self-fund their own deals, advisors have said.

Clement Keys said its research had shown many business owners in the region were opting to self-fund deals by selling their shares on a deferred consideration basis. This in turn, is helping drive deal activity locally and create a new trend in the market.

The firm said that in some instances, businesses were even turning down offers of bank finance in order to stay in control.

Clement Keys said that as market conditions showed signs of improvement, business owners were recognising that now might be a good time to pursue their exit or succession strategies while making use of the favourable tax arrangements available using Entrepreneur’s Relief.

It said that in doing so, many felt they were able to secure what they felt was a fairer deal and one that recognised the true value of their business.

Ross Cocker, corporate finance partner at Clement Keys, said: “A self-funded deal can be favourable to both the business and the outgoing business owner. For the business owner, exiting in this way allows them to realise investment without leaving the business short of cash.
 
“For the business, the fact that the deal is done on a deferred consideration basis with a friendly investor is far less risky. The outgoing business owner knows the business well and is much more likely to be sympathetic to unforeseen changes in market conditions or operational difficulties. Choosing this type of finance as opposed to a traditional bank lending also removes the risk posed by restrictive covenants and the like.”
 
He said another benefit of financing deals on a deferred consideration basis was that they could be structured in a cost-efficient way. Self-funding a deal allowed companies to remove the need for costly due diligence activity to be carried out at the same time as ensuring that deferred consideration repayments allowed capital for growth. The transaction fees for a self-financed deal would also be far less than could be achieved using a more traditional route.
 
“The opportunity to self-fund business growth plans is attracting significant interest from businesses across industry sectors, particularly smaller businesses that may have thought they couldn’t afford to finance such a deal,” added Cocker.
 
“However, the current tax regime is currently about as favourable as it can be and we are advising business owners who wish to take advantage of it to act now.”
 
Reflecting the interest in self-funded deals, the firm said it had noticed an increase in enquiries about lower-value deals. Since the start of 2014, the firm has advised on 10 deals valued at less than £2m each that resulted in self funding rather than external finance.