The Essential Roadmap to a Successful Distressed MBI
Posted on 1st September 2020 at 08:30
You’ve identified a distressed business management buy-in (MBI) opportunity, but that’s just the start of your journey. Your priority now must be to convince the administrators in charge of the distressed business that a sale to you and your team is the best route forward.
Remember, the administrator is focused on recouping as much value as possible for the creditors in a timely fashion. Showing that your MBI team are serious is essential if you want to be in with a chance.
Lining up a funding solution is one of the most important steps here and Lending Made Simple are exceptionally well placed to advise. But there are other elements to consider.
In this article Administration List, the real-time source for businesses in administration, explains exactly what lenders are looking for from management buy-in teams, so you can move forward with the opportunity you’ve identified.
What are administrators looking for from management buy-in teams?
The first thing administrators are looking for is, quite simply, a history. Administrators will look favourably upon management buy-in teams that have experience working together. It’s a sign that you are more likely to be serious and work well together – seeing things through from the point of acquisition to a full turnaround.
You can prove this with a track record. So, the first point on your roadmap to success should be to emphasise the experience your team has of working together.
An even brighter feather in your cap will be if you can demonstrate successful experience in distressed acquisitions. Previous wins with a similar target business, sector or deal are all things to highlight very strongly. They could be a key point of interest on your funding application roadmap and weigh heavily in your favour.
If your team has a diverse skillset then this will further boost your chances of success. The best teams complement each other and become more than the sum of their parts. Does your MBI team cover all the bases? Think about the key areas your target business will require direction in and bolster your ranks with individuals who can boast experience and knowledge in finance, marketing, sales and personnel.
Line up the cash
There is only one thing more important than your team itself, and that’s the cash. A distressed acquisition might be available below market value but we’re still dealing with big sums here and you need to prove that you have access to the cash required before you even ask for a seat at the table.
As always, knowledge is power. So let’s look at some of your options for structuring finance on a deal like this.
First up, think about what assets you have to offer as security for a lender. Your target acquisition is the first port of call; look at everything from stock to plants and machinery, outstanding invoices and property.
The business as a whole in its current form is in financial distress, but there are valuable assets within it; at least there better be, otherwise what are you doing there? You just need to help your lender to identify them and understand their risk levels.
It will also help you on the road to success, if you have assets of your own that you can put down to further mitigate the lender’s risk. Whether you have personal assets such as property or existing business assets which could include commercial premises or machinery and stock, a smart lender will consider the full picture.
Know your loan … and your lender
Your relationship with your lender is a critical one. Yes, you want good value, but a cheap loan is not necessarily the best loan. When approaching lenders it is always a good idea to understand the terms and conditions of the finance package and to think about the relationship over the long term.
This will ensure you not only apply for the type of finance package that will support your business ambitions and future plans, but by understanding a great amount about the deal on the table you’ll appear more prepared and competent to the lenders and the sellers.
Don’t assume the cheapest loan on the surface will be the best deal in the long term. Look for flexibility and some room to manoeuvre to allow for potential cash flow problems – you don’t want to be hit with massive penalties just for missing one payment.
Top tip - locate a funder with experience in the industry
If your MBI team want to buy a food wholesaler out of administration, look for a lender who has previously funded the acquisition of a distressed food wholesaler. They will better understand the risk and, crucially, the opportunity.
Knowing your funding options is perhaps the most important stop on your journey to a successful distressed MBI. For an administration team one of their key responsibilities is to the distressed businesses’ creditors; it is their duty to realise as much value as possible to repay creditors. If you can demonstrate that you have funding within your grasp, you quickly become part of a plan to pay creditors swiftly.
One last point here, don’t forget that you’re dealing with human beings. Being easy to contact and open to questions about your application will show the seriousness of your intent, and help build trust in your management team. On the flip side, when we say know your lender, we mean it – talk, meet, make sure you’re comfortable entering into a long term, financial relationship here.
Alternative finance vs traditional banks
Fortunately, if you have the experience and a plan you’ll find that there is a good deal of choice on the finance market these days. Banks are no longer the only option for teams who want to secure credit to fund an MBI.
The funding landscape is constantly evolving, so don’t just stick to the motorway as it were – it is crucial that your team knows what options are open to them. Alternative finance will open up many other routes to completion.
Some of the most experienced lenders will look at combined solutions on multiple assets. This means your team can secure your funding with assets either within the target business or existing assets owned by your management buy-in team – personal or professional.
The funding options available to management buy-in teams include using the debtor book of the target company (essentially invoice financing); asset-based lending on plant and machinery; commercial mortgages or property or even stock lending against any retained stock in the business.
As we said, knowledge is power here, so let’s outline how this might look. If you’re looking at a smart solution that bundles these funding options, it’s important to understand that the value that will be lent against each is restricted.
The caps might differ slightly between lenders, but here’s a guideline on how much of an asset’s value the funder with loan:
● 20 per cent on stock
● 70 per cent on plant and machinery
● 85 per cent on invoice finance
● 70 per cent on commercial property
In some rare cases, you can get borrow 100 per cent of an asset’s value. More recently the Coronavirus Business Interruption Loan Scheme (CBILS) has increased the possibilities here. This scheme is backed by the Government bringing an extra level of security to the lender.
Mapping out the right route for your team
A distressed MBI is a major investment. Make sure you set yourself and your team up for success by planning out your route in advance.
From finance to roles and responsibilities, knowing where you stand will bring confidence and authority to your approach, giving you all the more power when it comes to negotiating with administrators.
Before you approach a target acquisition, make sure you speak with an experienced funding advisor such as Lending Made Simple to line up your funding options.
Administration List provides real-time information about the latest businesses in administration in the UK. If you’re looking for your next MBI opportunity it could be an invaluable resource.
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