What alternatives to private equity are there for management buy-out of a family firm?

I am a senior manager of a family-run company in Yorkshire where the founder and chief executive will soon be retiring. The prospect of a management buy-out has been discussed and we have had talks with some private equity companies to back us. However, there is a reluctance from the family to allow a venture capitalist a seat on the board, as the company has numerous long-serving staff members who are regarded as family, and we want them to be looked after. Can you suggest alternatives or do you think private equity doesn’t deserve the bad press it gets?

A. Colin Mills writes:

Private equity can work well for companies that need equity investment and when the purchasers can’t raise either the equity themselves or debt on the business. However, effective control of the business usually moves to the investor. Things will be OK if you hit the financial forecasts you predicted to get the investment. If you don’t, things can get difficult, and your owners’ fears on hard decisions, including those of staff, may be realised.

Of course, there are other forms of finance you could consider:

… Can you raise money on the existing business? We’ve just helped an owner manager buy out his brother by raising money from the debtor book in the business through invoice discounting.

… Are there any other assets with no charges on them? For example, plant and equipment are obvious ones, but less so is stock or work-in-progress financing.

… There may be the opportunity to raise cashflow funding from banks to help finance the management buy-out.

… Maybe there is an option to negotiate the phasing of the purchase price over a number of years. This could help ease the pain of finding the purchase price all at once.

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… On a similar theme – would the existing family leave some money on the table, enabling you to buy-in initially on a smaller percentage?

… Your own sources of finance (including the well known sources of “friends, families and fools”) are also something to consider.

The above is not an exhaustive list, so it’s worth getting some expert advice. Good accountancy firms should be able to help, or you could approach companies that provide ‘part-time’ finance directors. The larger ones will have vastly experienced FDs who have experience in all the financing options.


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