Investec Growth & Acquisition Finance has seen a dramatic four-fold increase in the number of business owners looking to support MBOs of their own companies in the past 12 months.
This is mainly happening through vendors using loan notes and participating in the company’s equity structure.
Investec’s Gary Edwards believes this is a new growing trend. The benefit to the vendor is that they’re able to retain a financial interest in the business without responsibility for the day-to-day running of the operation. The management team, meanwhile, doesn’t have to raise the same level of capital at the outset of the MBO.
“A loan note helps vendors to feel like they’ve got good value,” explains Edwards. “Especially in this economic environment, it helps them get over the post-purchase, post-selling anxiety.”
A few years ago, everything was about price, owners would put their business to auction, and accept an offer from the highest bidder. But Edwards says this has changed. “We’re seeing much more moral or social responsibility from vendors. They’re wanting to sell to the management team that has worked for them and the business for ten years.”
He says that a lot of this is pent-up demand: business owners were waiting for the cycle to turn.
But Edwards adds that if entrepreneurs are still waiting, they should think twice. “It isn’t just a case of holding your breath, and if you wait long enough, the good times will return,” he warns. “The old business cycle won’t return anytime soon. Business owners have been holding off on making decisions, but they’re are now becoming more proactive.
“There’s been commentary suggesting that it’s still the wrong time to sell if you don’t have to, as it’s a low point in the cycle for value. But we’ve found that the use of loan notes or roll-over equity has facilitated deals that meet all stakeholder objectives while delivering shareholder value.”