Acquisition of Assets & Trading of a Loss Making Business

Essential Elements of Our Service Offering Required to Complete a Transaction of This Nature

Acquisitions, Business Sales, Exit Planning 
MBI, Private Equity, Raising Finance, Asset Finance, Invoice Finance
Business Plans, Due Diligence, Turnaround Management

We were approached by one of the top four banks to explore the possibility of us becoming involved with a business in which they had provided a significant term loan and overdraft secured against the company’s assets. They were concerned that whilst the value of the net assets was greater than the combined loan and overdraft of the business, it was making trading losses in the order of £500k per annum and if this situation continued and the bank were forced to call in the debts the assets would be difficult to liquidate at sensible values as a fire sale situation would arise.

On approaching the shareholders of the company they were initially hostile to us but nonetheless agreed to meet as it was the bank that had suggested it may be of mutual benefit. On meeting we established a good line of communication and won over their confidence, at which point we offered to carry out an initial review which would be of benefit to them as well as the bank. The key items that came out of that review were ·

• Incumbent management had taken control of the company following the death of the founder and had neither his entrepreneurial skills or ability to improve trading
• Without a significant improvement to trading been achieved the incumbent management had a period of about 2 years before running out of working capital
• Without a major change to the companies service offering they were in danger of losing existing blue chip clients and would not be in a position to secure any new ones
• The shareholders were reliant on the property assets to provide both their lifestyle and as a future pension

We then shared this information with both the bank and the shareholders of the company and suggested if agreeable to all parties we would put together a credible business plan that would provide an acceptable compromise for all. This resulted in us proposing the following turnaround option

• We should acquire the non property assets and all the business of the company in NEWCO at a discount to book value providing some headroom for our turnaround actions to take effect
• OLDCO would retain the property assets and become a property management company owned by the existing shareholders
• Newco funding would be made up of
  • share capital
  • directors loans 
  • bank term loan
  • bank confidential invoice discounting facility
  • sale & lease back of assets
  • potential to extend debt funding in the event of NEWCO identifying acquisitions

The proposal met with the approval of all parties and the deal completed for the following key reasons

• OLDCO shareholders benefited by
  • No further erosion of the net value of their property assets
  • Regular income paid to them by NEWCO by way of rent
  • Being able to pursue the lifestyle they wished as they had no ongoing management responsibilities
• Bank benefited by
  • Reducing their exposure to the company
  • Transaction fees 
  • Having a management team in place they were comfortable with 
• NEWCO shareholders benefited by
  • Acquiring a company’s trading assets and business at a sensible price 
  • Inheriting an experienced workforce
  • Having a spring board for further growth both organically & by acquisition 
  • Being able to control deal costs because of the common goal congruence created

Essential Elements of Our Service Offering Required to Complete a Transaction of This Nature:

Raising Finance, Business Viability Review, Lender Negotiations, Insolvency Options, Business Plan, HR & Employment Services, Legal Documentation

When a long established Direct Mailing House suffered from a downturn in trade, the Directors required advice as to the options that were open to them going forwards, both from a personal point of view to ensure they complied with their legal responsibilities as Directors, and the options available to continue with the business going forwards.

In this case, the benefits of planning ahead with a commercial approach proved fundamental when the business developed financial problems. The Company had been dependent on a loan provided by its Parent Company to provide sufficient working capital when the bank facility could not be increased previously. When the loan was made by the Parent Company, it was formally documented and a debenture was created and registered at Companies House, meaning that if the Company experienced financial difficulty it had a number of options available to it and would be paid in preference to unsecured creditors. The debenture was created in 2009, the Company entered insolvency proceedings in 2011, this shows the benefit of always structuring things in a commercial way to deal with any eventuality.

When the downturn in trade continued for more than a short time, a business viability review was undertaken which involved preparing cashflow forecasts to show when the company would run out of working capital based on the projected trading. When the review was completed, the option was for the Parent Company to provide additional funding which would be very risky based on the projected trading position, or for the Directors to consider other options. The Directors took insolvency advice and had all the options explained to them as to what they could do.

After carefully considering all options, the Directors accepted that there was no alternative but to place the company into Administration. Taking account of the circumstances in this case, and the fact that the Parent Company was the major creditor with security, it was agreed that the best option for creditors would be to try and sell the trade and assets of the Company in a Pre-Pack Administration. The Insolvency Practitioner has to go through a rigorous process in such a situation to ensure that best value is obtained for creditors. The process involves obtaining a valuation of all assets, consideration of any third party offers, and what is best overall taking account of all factors.

In this case the Directors wished to submit a bid to acquire the trade and assets of the business in order to be able to continue with the business. This involved using a new company (“Newco”) to do this, preparing a business plan incorporating financial forecasts, and raising finance. This involved a lot of work in a very short space of time, to ensure that the Newco would be able to make an offer and be able to operate within the required timeframe.

The business was marketed and another interested party put in a bid for the trade and assets alongside the offer from management. Directors are often alarmed in a Pre-Pack situation that the business has to be offered for sale, this is a requirement and there is no other option. In this case the marketing was handled in a professional and confidential manner by the Insolvency Practitioner and confidentiality was maintained at all times allowing the business to continue trading without disruption, whilst offers for the business were received.

The offer from management was successful and following the appointment of the Administrator, the Directors were able to immediately complete the acquisition of the trade and assets with the legal agreement having been negotiated prior to the Administration. The company continued trading in a seamless manner and customers were not even aware that the company had entered Administration. In the majority of cases, as management know their business they are usually in a position to make the best overall offer to the Administrator in such a situation. It is not always the highest offer that will be accepted, other factors are taken into account, for example are jobs being saved.

In this case the name of the business remained the same, in such circumstances where there are common directors in the Oldco and the Newco, there are legal requirements that have to be complied with in relation to the notification to creditors.

Following completion of the acquisition of the trade and assets, management had to reach agreement with suppliers regarding continued support, and deal with the transfer of staff to the Newco which usually automatically happens under “TUPE”. This means that all staff are transferred with the same terms and conditions as previously.

Post completion there were numerous matters to deal with, all of the equipment used by the company was leased and lenders had to be spoken to and new agreements negotiated. In such a situation, the equipment providers are usually happy to support the Newco, as the other option is to repossess their equipment and sell it in a forced sale situation, which in the current economic climate is the route of last resort. There were other matters that had to be dealt with by advising suppliers such as the Utility suppliers, the Council in relation to business rates, and other sundry suppliers.

Finance for the Newco was provided by way of an invoice discounting facility that had been negotiated on the basis of the profile of the previous business.

The business is now trading profitably due to the actions taken which has allowed the business to be restructured and not be dragged down by its historic losses. When Directors are faced with such a situation where their business is struggling and facing financial difficulty, the approach is to often ignore the issues and not take actions that would protect the business in the long term, which may possibly involve an insolvency option. By not taking advice at an early stage, Directors are jeopardising their business, and in many cases their whole personal situation as often they will have lent money to the business or given personal guarantees. To quote the Directors after the above case had been successfully concluded “Why didn’t we do it sooner?”

Acquisition of a Company Owned by Institutional Investors

Essential Elements of Our Service Offering Required to Complete a Transaction of This Nature  

Acquisitions, Business Sales,
MBI, Private Equity, Venture Capital, Raising Finance, Asset Finance, Invoice Finance
Business Plans, Due Diligence, Turnaround Management

Following the successful turnaround of a business in which management held 15% of the shares with the rest being held by a number of financial institutions; we were approached by another venture capitalist that had an investment in a company in a similar market that was significantly underperforming. 

The initial approach by them was to head hunt management to carry out a similar exercise to the turnaround just completed; they were informed that as management held shares they would not be interested in joining the underperforming business; however that we may be interested in acquiring the company. 

On meeting the venture capitalist concerned a potential acquisition looked an exciting prospect as the company concerned was of a similar size to that of the one in which we already held shares in, but in a slightly different but complementary sector, it was therefore decided to approach our own investors and bank to see if they would be interested in extending their investments and support management with an acquisition. 

Having received an in principal yes vote we met again with the incumbent VC in the target company to establish if they would in fact be prepared to exit their investment, again an in principal agreement was reached subject to financial viability. Following this meeting and on securing exclusivity sufficient information was made available to us to put together to be able to put together a credible detailed business plan which we first presented to our own investors and in conjunction with them agreed an offer structure, which facilitated management increasing their own overall shareholding. 

• No goodwill payment and a discount to net assets
• Funding largely through asset financing
• Strong customer base in a parallel sector with the opportunity to cross sell services and expand overall sales
• Large overhead duplication to be saved post deal providing sufficient savings to curtail losses
  
• Good geographic location to improve current network
• Modern commercial properties with capacity for expansion and increased revenue stream
• Seamless transaction to provide a business as normal situation for customers and suppliers

Business Plan, Financial Modelling, Budgeting and Forecasting, Raising Finance,
Legal Documentation

 A leading sales and marketing agency was expanding rapidly in the summer of 2010 following a period of new client wins, and in order to fund this continued growth it was identified that additional working capital would be required.

There was also a Venture Capital Investor in the business that was looking to exit if possible, having been involved for a number of years. The Directors were of the opinion that it would be good for the business if an agreement could be reached with the VC’s to allow the buyout, at a price that was somewhat lower than historic levels due to the economic conditions.

A three year forecast was prepared to show the funding requirements, taking into account the proposed buyout of the VC Investors. In respect of obtaining the funding required, due to the current conditions where bank lending is difficult to obtain, other sources of finance would have to be sourced. A Fund which is backed in association with the local council was sourced, which would lend SME businesses up to £1m, and in the appropriate circumstances would also consider equity investment.

After initial discussions, a full three year business plan was prepared and agreement was received to provide funding for the VC buyout and the additional working capital. The whole process was completed in a six week period allowing the business to continue with its planned expansion.

By the middle of 2011 the updated cashflow forecasts indicated that further funding would be required to provide additional working capital for the continued expansion. Discussions were held with the lender who gave their in principal agreement subject to an updated business plan and forecasts. An updated business plan was prepared and additional funding was provided.

Part-time Finance Director Services to Provide Financial and Commercial Support

Essential Elements of Our Service Offering Required:

Part-time Finance Director

When a commercial catering equipment services company had completed an MBO from a plc, they quickly found that they lacked the financial and commercial expertise required in order to help with the planned business growth. A very good finance team was in place, but the high level requirements could not be met with the current structure.

By providing a part-time Finance Director to work approximately one day a week, this enabled the Directors to concentrate on running the business and allow all financial and commercial matters to be dealt with by the part time FD. The FD took a small equity stake to ensure the management team were harmonised as one and were totally focused on growing the business.

This allowed the business to enjoy rapid growth over the next 12 months following the appointment, which ultimately resulted in the sale of the business to a plc thus providing an excellent return for Shareholders in a very short time.

By bringing in expertise by way of a part-time FD, this allowed the Directors to focus on the operational side of the business, and when the sale process commenced it meant they were not totally distracted from the running of the business that often happens when going through a sale process.

A part-time FD can bring real value to a business that cannot afford, or does not require a full time FD.

Sale of a Company Owned by both Management & Institutional Investors

Following a BIMBO some 10 years previously and having subsequently built up the business by way of acquisition and organic growth to become a substantial operator in the Logistics and supply chain sector with a turnover in excess of £40M, it was decided that the time was right for shareholders to realise the profit of their investments.  The shareholders were made up of Institutional investors and the senior management.

Finding a Purchaser & Presenting Our Business

Following extensive discussion  all felt that best value would be achieved by selling the company to a trade buyer rather than burden the business with additional gearing with a secondary buyout and as  CEO I had a considerable number of contacts through networking within the sector and was able to identify a suitable potential purchaser that had the “Will & Wallet” (both acquisitive & had the funding) to see the transaction through to a successful conclusion, coupled with the fact I knew of the interest of this company to provide supply chain solutions to the Automotive Sector which was an area our business was particularly strong in and would therefore add best value for the exiting shareholders.

Having completed a number of acquisitions as part of our own growth strategy we were well prepared to ensure the relevant information was made available to the purchaser in a format that would help smooth the process, this was important as we did not wish the transaction to become public knowledge until it reached completion for fear of losing customer confidence and staff loyalty, both of which of course were key to the value being placed on the business, and therefore we wanted to ensure that the process could be completed in the shortest possible time.

Again through previous experience gained we were able to limit the number of professional advisers that would otherwise have been essential, this did however put additional pressure on us as the sale process itself was a huge distraction to the day to day running of the company which I still had a particularly hands on role in managing. (ibv would expect to handle significant amounts of this additional workload on behalf of our clients).

Once the decision to sell had been taken we put together a timetable and action plan which we felt was realist and workable without having a negative impact on the company. There were a few key items depicted below that we knew if addressed would add shareholder value, and that we should attend to these prior to entering into serious negotiations with the potential purchaser.

Whilst we were comfortable with a “sweetheart” type deal having approached this specific potential purchaser, we nonetheless decided to appoint a Corporate Finance House to operate at arms length and research the sectors appetite for acquisitions and benchmark valuations for businesses in this sector (ibv offer this service to their Clients), this work was carried out and the conclusion drawn that at this stage of the process there was no conclusive evidence to suggest we had not made the right decision in targeting this purchaser and in fact there was a perceived risk of destroying value should we involve several parties in an auction type process as it would considerably extend the time frame and expose the business to the afore mentioned potential risks.

Key Items to be Addressed Prior to Serious Negotiations

• Secure the customer base on long term contracts to provide an attractive contractual income stream for the purchaser.
• Maximise the profit by taking a shorter term view than would normally be satisfactory.
• Clean up the Balance Sheet to the tax effective benefit of shareholders and to simplify as far as possible the transaction for the purchaser to be one of mainly Goodwill.
• Review Key staff incentive schemes to ensure they remained attractive and would assist in staff retention for the purchaser post completion.
• Tidy up of Group structure, dormant and non trading subsidiaries that existed mainly through acquisition be cleaned up as required.
  

Having completed these key items we were confident that shareholder value was being maximised and that we had significantly reduced the potential for any chipping away at the price during the Due Diligence process.

Agreeing the Price, Terms & Conditions

From the information supplied the potential purchaser was able to make an indicative offer, this was discussed in detail with management and subsequently revised based on clarification of some of the precise customer contractual terms.

Once the mechanism for calculating the price was disclosed, the research carried out by the Corporate Finance House was revisited to ensure that we were not potentially missing an opportunity; in fact it was bang in line with the research valuations.

The next stage of the negotiations was to agree commercial and personal terms; this can be a deal breaker dependant on the view taken by the Vendor in relation to;

Tax effective payment structure

As with many companies the exiting shareholders had different circumstances in relation to how payments were best made to them to provide a tax efficient sale of their shares. These differing priorities were reviewed and specific tax advice taken by each shareholder, once the best option for each shareholder was established an open and frank discussion and negotiation was held with the purchaser as to how these individual objectives may be achieved  within the relevant tax frameworks and  where possible without having a negative impact on the Vendors or  adding additional costs for the purchaser, you must remember a structure that provides an equitable balance for both Vendor and Purchaser is the best way to ensure the transaction remains on the rails.

Continuation of employment with the purchaser

In our case, of the exiting shareholders  it was only myself who was offered a role in the purchasing business and as in most cases it was crucial that I agree to stay on to keep the purchasers confident in the transaction. This is where the “sweetheart” arrangement comes more into play, as I was keen to move on and start again in another venture I did not want to be locked in to a long term commitment and as I was likely to return to the same sector neither did I want onerous restrictive covenants. By using the fact that the purchaser was in effect having an exclusive opportunity I was able to use this to negotiate a fixed term contract for 6 months from the date of completion, in addition as I was being totally upfront regarding my future aspirations the restrictive covenants were openly discussed and agreed to the mutual satisfaction of both parties.

Deferred Payment

A deferred payment was agreed; this covered a 3 month period post completion to provide comfort that there were no negative surprises for the purchaser, at the end of the agreed period the payment was made in full to all shareholders pro rata to their shareholding. The amount of the deferred payment varies deal by deal and is a negotiable number.

Earn Out

As I was going to be working for the purchaser for the 6 month period post completion we needed to agree a remuneration package including an Earn Out. The Earn Out is in effect an additional payment for meeting specific targets during the transition period, again the amount of an Earn Out varies deal by deal as does the mechanism for its calculation, however I negotiated a set of performance criteria that that provided real financial incentive for me and a genuine benefit to the purchaser if the targets were met. The Earn Out was specific to me and paid only to me in addition to the agreed price of the business.

Warranties

Warranties are an inevitable part of any business sale process; they are in effect a personal guarantee by certain shareholders that information provided to any purchaser is accurate and in most cases there is a period of around 18 months post completion for any discrepancy to come to light. If it transpires that there is an issue the purchaser may claim compensation form those that have signed the Warranties by way of claiming back elements of the monies paid by them for the business, often without the need to resort to court action. The mechanism and quantum varies deal by deal however be aware that in most cases external shareholders such as venture capitalists will not sign Warranties as they have not had the benefit of the in depth knowledge of the company and therefore the opportunity to ratify the information given to the purchaser for themselves and it is left for the management shareholders to negotiate these. One thing to consider is that usually Warranties are pro rata to individuals shareholdings, however if a company has a 10% external shareholder, and a claim is made for £100.00 of the purchase price paid, the remaining 90% shareholding will be required to reimburse the £100.00 not the £90.00 they originally received, this is however usually capped by claims against any individual shareholder not being in excess of monies received from the original sale.

Conclusion

With all the above negotiated and agreed, we set a specific completion timetable and kept pressure on all parties involved to ensure that it was adhered to. This was successfully achieved and the deal completed to both the Vendors and Purchasers satisfaction. Three months after the deal the Deferred Payment was made in full and six months later the Earn Out was reconciled and duly paid. I then left the business to move on to pastures new.

FORENSIC ACCOUNTING / SHAREHOLDER DISPUTES

Essential Elements of Our Service Offering Required to Complete a Transaction of This Nature:

Forensic Accounting, Shareholder Disputes, Legal Documentation

IBV were approached by Director / Shareholders in a company to understand what their rights were, as they believed that the other Director / Shareholders were running the company in such a way that was prejudicial against the minority shareholders. As is often the case they did not know what rights they had, and believed that as minority shareholders their rights were very limited. In fact they held a substantial minority, and they had a number of courses of action open to them.

The business concerned had been set up a number of years previously with a number of Director / Shareholders, and also a number of external investor shareholders. No formal agreements were put in place at that time in relation to Shareholder Agreements or Director’s service contracts, therefore the company was governed by its standard Articles of Association. The first thing to note in this case is you should always ensure full legal documentation is put in place when entering into a business relationship.

The business had grown considerably over the years and had got to the stage where it was making substantial profits. IBV had been approached because it was believed that the other Directors were taking excessive sums from the company without the knowledge of others.

• An initial free no obligation meeting was held to discuss all aspects of the issues that the Director / Shareholders had, and to understand what they were alleging against the other Directors.
• After the initial meeting, IBV in association with legal advisors introduced by them summarised their rights and possible courses of action open to them. The absolute key issue was that to successfully pursue a case, evidence was required of the alleged wrong doing that could be used in Court.
• IBV provided expert advice and guided a process that covered many weeks in extracting financial information in order to prepare a report for legal review. The key advice provided at this stage was that as hard as it was, the Director / Shareholders had to get on with business as normal, and not alert others of the investigations that were being undertaken.
• IBV produced a detailed report summarising matters that detailed evidence of financial wrong doing by other Directors, and a number of other matters that were detrimental to the minority shareholders. This report was then reviewed by legal advisors who stated that a very strong case existed based on the evidence in the report.
• A meeting was held with Legal Counsel, and the advice was that based on the strength of the evidence and the level of financial wrongdoing, a without notice injunction could be applied for in the Courts to immediately limit what was being drawn out of the company by the other Directors. The without notice injunction was applied for and successfully obtained.
• A petition was issued by our clients pursuant to Section 994 of the Companies Act 2006, which asks a Court to rule in relation to unfair prejudicial action by certain Director / Shareholders against minority shareholders. The Court has wide ranging powers under such an action.
• At this stage, there was the small issue of continuing to run the business, and this in itself proved very challenging for all parties who were in the middle of a major dispute. IBV were able to provide support at all times on a 24/7 basis, as for individuals involved in such disputes it can be a very stressful and unpleasant experience.
• The legal process continued over the subsequent weeks, with IBV being involved in all legal matters, working very closely with the lawyers. IBV have extensive legal knowledge and are therefore able to provide excellent support in such cases.
• It became clear after the defence was filed by the other Directors, that the legal case of the IBV clients was very strong, and the legal advice was that they would almost certainly be successful at trial. For a case to reach trial in such situations, there would normally be a delay of between 12-18 months, thus this causes many practical problems of Director / Shareholders continuing to work together.
• As is often the case in these situations, negotiations commenced between parties to reach an agreement to end the dispute. Negotiations took place over a number of weeks, and due to the strength of our client’s legal case we were able to negotiate a very successful outcome in relation to the sale of their shares.
• IBV were involved throughout the case on a daily basis, from the preparation of the forensic accounting report to obtain an initial legal opinion, right through the court actions, and ultimately the legal documents to conclude the sale of our client’s shares.
• By having been involved personally in running businesses and dealing with all kinds of legal disputes over 25 years, and having the accounting knowledge as well, the IBV offering in such cases means that clients receive unrivaled support to obtain justice for themselves.
• If you think you are being treated unfairly in a business situation, always do something about it, your rights may be stronger than you think. A free initial meeting with IBV will allow you to discuss matters and obtain an independent opinion.

Client comment in relation to the above case:-

“I was recommended to IBV by a friend, and I have to say it was the best recommendation I have ever received. I was unaware of my rights, and knew that the company was not being run properly, and feared I could lose everything after dedicating many years to building up the company. At the first meeting I was advised as what my rights were, but very importantly it was made clear to me that without evidence there was no case. With the support of IBV we were able to prepare a forensic accounting report for legal consideration, that enabled us to obtain an injunction and put us in a very strong position. IBV then provided 24/7 support over the next few months as matters progressed. Ultimately IBV assisted in negotiating the agreement for the sale of our shares, so provided support and advice in the case from start to finish.

The work undertaken by IBV to achieve the result we did was absolutely critical in achieving an outcome that far exceeded expectations. They took a proactive role in the whole process, and ensured that they worked with the lawyers in a seamless way in putting our case together. I can only say they were brilliant in every aspect of the case, and their overall personal support was exceptional”

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