Newcastle United have recently announced their decision to sell on flexible funding terms. Lucy Freeman, assistant solicitor in Wilkes’ corporate team, looks at what that means for potential purchasers and what management teams and business owners alike can learn from it.
A statement released by the owners of Newcastle Football Club on the potential sale said that “to give the incoming owner the maximum possible flexibility to make meaningful investment in the club…the sale process will give interested parties the opportunity of deferring substantial payments.”
This means that investors will not have to find the full purchase price up front, but can make several payments over a specified period of time – potentially drawing on the profits generated within the business to fund the purchase price.
Lucy notes, “Many management teams and entrepreneurs are dissuaded from exploring how they might expand by acquisition or buy their own business because they personally do not have the available cash to fund the deal. There are in fact many flexible finance options and different types of funders who are keen to help buyers fund deals. Often, these finance options can be secured on the resources of the target, rather than the borrower.”
Finance options could include:
Asset backed lending – Here the company uses assets such as inventory, invoices, equipment or machinery as security for a loan. It can release the cash that is tied up in those assets and use it to fund the deal.
Cash flow lending – This is where the funder lends against the future income stream of the company. Rather than requiring physical security such as property or assets, the lender examines expected future incomes, the company’s credit rating and its enterprise value.
Mezzanine finance – This is effectively a loan where the debt becomes an equity share after a predetermined amount of time. So, if the company cannot repay the loan, the lender gets a stake in the business instead. In other contexts, mezzanine finance blends debt and equity by offering a share of profit as well as interest payments. It is often used where the perceived risk is high and traditional business loans will not provide the requisite level of funding.
Private equity – Private equity firms offer finance in return for equity stakes in potentially high-growth companies. They typically support management buyouts and buy-ins in mature companies as opposed to venture capital which provides funding for early stage companies. The private equity firm will often develop a close relationship with the company’s management team and deliver operational expertise to add value to the business.
Crowd funding – This involves raising many small sums of money from a large number of people, typically online. It can take the form of debt or equity. Debt crowdfunding (also known as peer-to-peer lending) allows investors to receive their money back with interest. Equity crowdfunding allows them to invest in exchange for a small stake in the business. The appeal for investors is that they can put small sums of money into projects they believe in.
Angel investors – These are wealthy individuals who invest in early stage companies in exchange for a stake in the business (think dragons den!) They usually have considerable experience, knowledge and useful contacts and are incentivised by tax breaks under the Enterprise Investment Scheme. Angel investment networks act as facilitators by connecting businesses with potential investors.
As with Newcastle United, the seller could accept deferred payments. These may be fixed over a period of time or, alternatively, may be structured as “earn outs” whereby they are linked to the future performance of the target. Earn outs are often used if there is uncertainty about the future performance of the target or to incentivise and retain sellers in the crucial post completion period.
Either allow the Sellers to obtain a better price for the business than the purchasers are willing (or able) to fund on day one, and allow the buyer to fund the purchase price from the profits and cash generated by the business.
“Investors are increasingly turning to business as an attractive means of diversifying their investment portfolios” notes Lucy. “Peer to peer lending for example can often mean a far better return compared to the “best buy” deposit accounts at banks. With “buy to let” investors also seeing a dip in profits due to changes in the tax rules, they are also willing to look elsewhere. Investing in business is often seen as an alternative means of reaping rich rewards and this is great for companies looking for finance.
“As a result, management teams and entrepreneurs should be aware that there is now a far greater variety and choice of potential sources of financial solutions available to buy businesses than at any time since the financial crash.”
If you want to grow your investments or business through acquisition, then you should seek professional advice. The Wilkes Partnership can help guide you through the legal aspects and introduce them to the right corporate finance houses for them.