Raising the money needed for a management buyout

As a business that had been wholly-owned by a bigger plc, access to finance was not something manufacturing firm Ash & Lacy particularly had to worry about.

However, when it underwent a management buyin (MBI) during 2011, that situation changed and suddenly the business needed a significant amount of capital to not just get the buyin away,?but also fund the growth strategy devised.

Based in the West Midlands, Ash & Lacy is in the business of metal building envelope systems. Clients include major supermarket chains such as Lidl and Argos, which employ Ash & Lacy to aid in the construction of both stores and depots.

According to finance director Andrew Waterhouse, up until 2008, business was good and turnover was roughly ?3m a month for the first half of that year. However, towards the end of 2008, the bottom dropped out and trade seemingly went overnight.

?We were doing lots of distribution centres, and that fell away quite quickly. Because of that the business had to change, and at that time we started doing school building as part of the government?s Building Schools for the Future scheme ? and survived off that.?

Waterhouse very much views the construction industry as first out and last back in when it comes to an economic crisis. In rebuilding the business, management decided to make the company independent and searched for finance mechanisms to support this.

?We needed roughly ?7m and selected asset-based lending for a number of reasons. One was that we had lack of security in terms of fixed assets, we leased all of our premises. We also wanted funding that was quite flexible. The business was at the base of turnover so as sales increased we needed working capital to fund that,? Waterhouse explained.

Ash & Lacy looked at venture capital but didn?t want equity dilution or involvement of other parties. Waterhouse and the team didn?t have any experience of asset-based lending, so experienced quite a steep learning curve. With the first finance partner, it quickly became clear that it didn?t understand the business and an ?amicable? parting of ways was secured in 2013.

?We were the last construction firm in their portfolio and they wanted out ? so did we. Starting to look for another funder, we were then better placed because of the familiarity with asset-based lending as a funding mechanism.?

The company?s second partner came with a clever software package that pulls information from Ash & Lacy?s systems, meaning daily reconciliation can be provided rather than a ?quite cumbersome and painful? monthly process.

Ash & Lacy?s 2011 facility was just that, Waterhouse explained. ?The whole admin of the facility was cumbersome, archaic in the way it was done. We?re looking at refinancing now and one area of examination is where interest rates are ? what are the advanced rates.

Waterhouse added that the business also needs to make sure its reserve set up is ok, as its covenance before hasn?t been suited to Ash & Lacy?s seasonality. Getting the right asset-based lending facility is key and now grows as the company?s turnover does. If the basic limits are right, and growth potential built in, Waterhouse said that renegotiation is not necessary.

?The only disadvantage is that there is more admin than a traditional overdraft facility, and we?re audited more regularly. In terms of forms of finance, it really does suit us.?

On the advice front, Waterhouse recommended going into it with your eyes wide open. He also revealed that lenders will be keeping a close eye on the business. Because of this he suggested being aware of availability going forwards.

?Forecasting 6-12 months ahead is a minimum. If you have a problem coming, make sure you see it in advance and realise if it is something repayable on demand.

?I?d never say never in terms of looking at other options, something like peer-to- peer is new on the block. In terms of venture capital, I think the problem with that is lots of businesses don?t want to dilute equity and get interference.

?Other than getting back to loans and overdrafts, for us in the next 3-5 years I can?t see any other way than asset-based lending.?

This interview is taken from a larger and more in-depth look at asset-based lending, written by Real Business and sponsored by ABN AMRO Commercial Finance.

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