26 mergers & acquisitions
Taking the lead: vendor-financed M&A
Penningtons Manches corporate lawyer Elizabeth Yell examines the increasing trend towards seller financing as a means of closing business transactions
The typical management buyout (MBO) structure will usually involve the management team setting up a new company to make the acquisition of the target. The acquiring company will often be financed by management and then a combination of private equity funding and bank debt.
However, given the lack of availability of bank finance over the past five years, one alternative solution has been for exiting shareholders to fund part (or all) of the buyout themselves. Although this structure means that sellers will have to wait for the proceeds of sale to be paid over a period of time, it is generally welcomed by retiring owner-managers as a structure to secure the future of their business and allow for succession planning.
As with the usual MBO structure, on a vendor-financed MBO, the selling shareholders will still sell all their shares to the buyer on completion (often to preserve the benefit of entrepreneurs’ relief) and sometimes ’reinvest’ a proportion in the acquiring company. Some, or all, of the purchase price will then be deferred for a period of months or years. This deferred payment for the shares will generally take the form of a loan (often secured) from the exiting shareholders to the buyer. Ordinarily, the buyer will satisfy the loan by making payments to the exiting shareholders upon receipt of dividends from the target or via an inter-company loan.
Where a large proportion of the sale price is left outstanding as deferred consideration, it might be appropriate for sellers to think
HWB advises on sale of medical supplies company
Leading Hampshire accountants HWB has provided support in an international deal involving the sale of a medical supplies company, Andover-based STOK UK.
HWB worked closely with the shareholders and their solicitors as STOK UK was acquired by global outsourcing specialists arvato UK, a leading global outsourcing partner to the private and public sectors and part of the German- based Bertelsmann Corporation.
STOK UK is a logistics and fulfilment specialist which works with hospitals and medical product manufacturers.
It takes over stock management of key equipment, such as defibrillators and pacemakers in hospitals, monitoring levels on behalf of suppliers who hold NHS contracts and making sure the items are available when needed.
Richard Hurst, a director at HWB, based in Chandlers Ford, acted for STOK UK’s shareholders Paul
shareholding in the target company, a detailed shareholders’ agreement and tailored set of articles of association regulating the relationship between the shareholders of the buyer will be required. If a seller is to maintain a significant interest in the target business, however, he also may not be able to benefit from entrepreneurs’ relief. In any event, tax advice should be sought early in the process so that the transaction can be structured in a way that optimises the tax position for the parties.
about ’step-in rights’. ’Step-in rights’ will often provide for sellers to take back control of the target company, or even reacquire their shares at nominal value. This may provide a remedy for sellers in the event that the buyer defaults on the repayment of the deferred consideration.
In the situation where exiting shareholders maintain a
Wilkinson and David Royle, giving advice on the deal structure and assisting them with negotiations.
Wilkinson, director of STOK UK, said: “Richard was calm and collected and helped us through a very intense day as we moved towards finalising the deal. With a major transition like this it’s the details that matter most, and Richard’s help was invaluable in seeing us through the process.“
Pitmans LLP, led by corporate partner Stephanie Perry and assisted by Mark Metcalfe and Sarah Lake, acted as legal advisers on the transaction.
Davis Lombard acquired
HJS Accountants, with offices in London and Southampton, has acquired accountancy firm Davis Lombard, with offices in Winchester and Fareham.
For HJS, which specialises in owner-managed businesses and personal tax clients, the acquisition underlines the firm’s commitment to the development of business in Winchester and the surrounding area.
All staff at the Davis Lombard office in Fareham have been relocated to the HJS head office in Southampton.
Penningtons Manches LLP has extensive experience advising both management and exiting shareholders on MBOs and vendor- financing arrangements, and would be pleased to hear from you if you would like to discuss any aspect of this article in more detail.
Details: Elizabeth Yell 0118-982-2640
elizabeth.yell@
penningtons.co.uk www.penningtons.co.uk
www.businessmag.co.uk
THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – SEPTEMBER 2014
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