DFK UK & Ireland

VIMBO’s a way to unlocking value in your business

Traditionally there have been two ways to release the capital value locked up in a successful business: sell it to a trade buyer or float, writes Debbie Clarke, partner at CV Capital LLP.

These however are not always the perfect solutions especially in the current climate. Perhaps you have an excellent management team but still want to have some involvement in the growth of the business or don’t really want to expose yourself and your company to the very public gaze of being a quoted company, or are worried about the company losing the culture you have grown by selling to a trade buyer.

In these circumstances looking at a vendor initiated management buyout (“VIMBO”) may help to unlock value in the business as well as securing often much needed succession. A VIMBO would typically work for an owner looking for a full exit from the business but can in some circumstances be applied to partial exits.

If a partial exit is to be considered then the exiting owner needs to demonstrate that they are still committed to the business going forward and can hand over the reigns to the second tier management.

Second tier management need to be strong for any MBO to work and a VIMBO is no exception. Securing funding for such transactions will hinge on the ability of the management team to perform against budgets and develop and grow the business. The management team will also need to put some personal equity into a VIMBO to show their commitment to taking the business on. There is no magic formulae for how much VIMBO’s a way to unlocking value in your business equity a management team needs to secure personally but it needs to be an amount which the team would not want to lose thereby focusing their minds on the success of the business.

A VIMBO would typically work for an owner looking for a full exit from the business but can in some circumstances be applied to partial exits

Historically these types of transactions were structured with as much debt as possible. In the current market this is not advisable and whilst a significant proportion of the transaction can be structured through debt an equity investor may also be required to ensure the business is not too highly geared. Having a business with strong cash flows to facilitate the debt and provide returns to all the shareholders is a must.

The debt element of the financing could be secured on the debtor book of the business, any assets, such as property and the ongoing cash flows of the business. Despite what we may read in the press there is finance in the markets for these types of transactions but structuring to ensure serviceability is key.

From a shareholders perspective, there are two more important considerations for you to take into account. The first is whether or not you and the management team can work with equity investors. It’s very likely that any investors your advisers introduce to the transaction will be active investors looking to contribute to the success of their investment.

The team will be seeing a lot of them, especially if budgets are missed. You all therefore need to be confident that you are happy with the way that they work and with the team that they have allocated to working on your business. With that in mind, ensure you carry out as much due diligence on the investor and their team as they will on you and your business.

Equity investors are normally happy to let you talk to other companies they have made investments in and this is well worth doing. The second consideration that you need to be aware of, is that it is likely they will want to exit from the business in three to five years, as they are not going to put themselves in a position where their investment is stranded without a sale plan. The management team needs to be sure that the timeframe is in keeping with their plans as it is highly likely that they will be exiting with them or undertaking a secondary buyout potentially bringing the next level of management team in.

A VIMBO can be an ideal way of shareholders releasing equity in the business they have built up as well as providing a route to empowering the existing management team to continue the growth of the business as a private company. If shareholders have confidence in their management team a VIMBO is a effective solution to succession planning.

In 2008 CV Capital LLP completed the management buyout of Henley based CD Team Limited (www.cdteam.co.uk). CD Team presented all the classic qualities of a VIMBO having a strong management team, stable financials and a number of opportunities to develop the business. The CV Capital team worked closely with the management team over a period of five months to structure their business plan and financial forecasts and assist Jo Fone and Richard Dearing in raising debt finance and structuring the VIMBO.

CV Capital LLP, the specialist corporate finance boutique of Chantrey Vellacott DFK LLP, work with owners reviewing all options for sale and management teams on structuring and funding MBO’s, and VIMBO.

Contact:
Debbie Clarke
CV Capital LLP
07815 120566
dclarke@cvcapital.co.uk

This article was published in:
THE BUSINESS MAGAZINE – THAMES VALLEY – JUNE 2009
www.businessmag.co.uk

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