Think back two years – it might as well be a lifetime ago – you were running a successful business in a thriving sector and planning an orderly exit and retirement over the next 18 months or so. You had watched as similar businesses had been sold to venture capital backed management teams or trade buyers for prices reflecting profit multiples of six, seven or more. You had made efforts to make the business attractive to potential buyers and started to consult advisers about how to get the best price. Even on a pessimistic assessment, retirement lifestyle prospects looked fairly good….

…and then came the credit crunch and the recession. You are still at the helm. Business is more difficult than you ever remember; cash flow is a daily concern and you are constantly looking over your shoulder at your bank manager, who is himself under pressure to recover loans to all but the very top end business customers as quickly as possible. Far from being able to sell the business to the highest of a number of bidders, no-one is buying. Even if they were, they can’t get the funding to do the deal and keeping the business afloat is a more pressing concern than realising your retirement fund…..

Not a nice position to be in of course, but a common one at the moment. However, is the position as stark as it seems? Is there a way in which you can achieve the plans of two years ago and retire gracefully and with a reasonable pension pot? Remarkably, for businesses which remain strong and well managed, the answer could well still be yes. 

Putting undue defeatism to one side, let’s examine the position as we see it today:

• Whilst the options have definitely reduced substantially, there are some venture capital funders who are prepared to fund deals without the sort of bank leveraging which they previously relied upon. Some are even prepared to fund 100% of the purchase price (with a view to refinancing when the banks relax somewhat) and management buy-in candidates have money they would rather not put into the stock markets or property at this point.
• You will not achieve a purchase price equivalent to those achieved by your brethren two years ago. Typically, for many sectors, businesses are being valued now at between two and four times its sustainable profit. If this will make an exit viable for you, taking into account the effort and risks of continuing to operate the business in this climate, then it is worth considering despite the fall. Bear in mind that business valuations are highly unlikely to recover to anywhere near previous levels in the short to medium term.
• There are certain banks which are prepared to lend money to buyers of good businesses. However, they will now typically expect at least 50% of the purchase price to be funded otherwise than by them and the price of bank funding will typically be at least 3% above base rate (although this is not necessarily, in absolute terms, a higher rate than that which applied two years ago given the prevailing 0.5% Bank of England base rate). Arrangement fees are also typically much higher at present.
• There are, in some sectors (notably healthcare, utilities/energy and environmental/waste/recycling), well funded corporate acquirers who will be keen to take advantage of new lower multiples and reduced competition to secure acquisitions and bolt-on additions to their businesses – acquiring a business for a price of 3 times its profits should lead to a very useful return on capital employed.
• In order to make the deal work, you may well have to consider a more gradual exit, leaving part (even most) of the purchase price invested in the business, to be realised gradually over time. This could involve remaining as an equity investor in the business with a gradually decreasing stake, or converting your equity at least partly into debt (with security ranking behind the funding bank) to be repaid over time from the cash flow generated by the business. Nevertheless, if realising your retirement fund in instalments is an option for you – and one would suggest it is for most owner-managers - this approach may make the exit achievable.

Retirement and realisation of your business’ value is still therefore possible. If you are prepared to accept a realistic exit valuation and your business is able to service a conservative level of additional debt, it may well be possible to structure and fund a sale, whether to existing management, individual investors or a corporate trade buyer.  

The question for owner-managers who were previously considering an exit is: does retirement remain your desire in spite of the above constraints? If so, then it might be worth removing head from hands (where it has understandably been residing for about a year now) and picking up the phone to that adviser again to see just what can be achieved.

Corporate newsletter - Winter 2009