A business (Company A) was approached by one of the top four banks to explore the possibility of becoming involved with a business (Company B) in which they had provided a significant term loan and overdraft secured against the company’s assets. They were concerned that whilst the value of the net assets was greater than the combined loan and overdraft of the business, it was making trading losses in the order of £500k per annum and if this situation continued and the bank were forced to call in the debts, the assets would be difficult to liquidate at sensible values as a fire sale situation would arise.
On approaching the shareholders of Company B, they were initially hostile to the proposal but nonetheless agreed to meet as it was the bank that had suggested it may be of mutual benefit. On meeting, a good line of communication was established, at which point it was agreed to carry out an initial review which would be of benefit to them as well as the bank. The key items that came out of that review were: -
- Incumbent management had taken control of the company following the death of the founder and had neither his entrepreneurial skills or ability to improve trading
- Without a significant improvement to trading being achieved the incumbent management had a period of about two years before running out of working capital
- Without a major change to the company’s service offering, they were in danger of losing existing blue-chip clients and would not be in a position to secure any new ones
- The shareholders were reliant on the property assets to provide both their lifestyle and a future pension
The information was shared with both the bank and the shareholders of Company A and B and a business plan was put together that would provide an acceptable compromise for all. This resulted in the following turnaround proposal: -
- Company A should acquire the non-property assets and all the business of the company in NEWCO at a discount to book value providing some headroom for our turnaround actions to take effect
- Company B would retain the property assets and become a property management company owned by the existing shareholders
- Newco funding would be made up of:
- Share capital
- Director’s loans
- Bank term loan
- Bank confidential invoice discounting facility
- Sale & lease back of assets
- Potential to extend debt funding in the event of Company A identifying acquisitions
The proposal met with the approval of all parties and the deal completed for the following key reasons: -
Company B shareholders benefited by
- No further erosion of the net value of their property assets
- Regular income paid to them by NEWCO by way of rent
- Being able to pursue the lifestyle they wished as they had no ongoing management responsibilities
Bank benefited by
- Reducing their exposure to the company
- Transaction fees
- Having a management team in place they were comfortable with
Company A shareholders benefited by
- Acquiring a company’s trading assets and business at a sensible price
- Inheriting an experienced workforce
- Having a spring board for further growth both organically & by acquisition
- Being able to control deal costs because of the common goal congruence created
