David Sharp and Jim Moore
Insight:
When entrepreneurs look to exit their businesses, banks are still risk-averse when it comes to backing management buyouts. But River Capital in Liverpool is funding an increasing number of deals. Tony McDonough reports
Liverpool-based business loan and equity provider River Capital is handling an increasing number of management buyouts (MBOs) with banks still reluctant to accept the risks associated with an MBO.
River Capital investment manager Jim Moore told LBN he and his team had backed around half a dozen MBOs in the past 12 months with cash from the NW Business Growth Loan Fund. And there are another three deals in the pipeline.
In August 2024 River Capital provided a six-figure sum to law firm directors Richard Entwistle and Shoab Panwar, so they could buy out the founding partner of Crosby practice Black Norman Solicitors, Howard Norman, who founded it in 1976.
And in April this year Dave Sharp secured funding to acquire Liverpool chartered surveyor Actua from long-time friend and business partner Simon Fullard. They had founded the firm together 14 years ago.
“There are more deals coming through where our sweet spot is, on the lower end of the management buyouts, because the high street banks don’t have the appetite to fund them,” said Jim Moore.
“They want to be funding MBOs for very well-established businesses that can demonstrate strong financials both historically and going forward, usually supported by a panel of advisors.”
“At River Capital we look at how the business will be operated going forward under the new management team, because that is ultimately who we are backing. We have a more forward-looking view.
“I am ex-bank and I understand they have a limited amount of funding they can commit to MBOs. So, they tend to cherry pick the bigger deals where they do the larger transactions and where businesses are punching strong EBITDA numbers in excess of £500,000.”
“Our sweet spot is up to £1m to £1.5m exit. We will fund an element of it as long as there is some vendor deferred consideration. Typically, the most we would want to put out on day one would be £500,000. We could go above that for the right profile deal.
Jim explained that a vendor who is willing to defer some of their payment can help the deal go through more smoothly. He added: “They will get a sizable amount of cash on day one, but they won’t get it all.
“We had one, for instance, that was turning over in excess of £2m and making annual profits of more than £300,000 and they were forecasting after the MBO they would generate £500,000 in profits.
“A bank would be reluctant to back that because they haven’t shown those kinds of margins historically. So, we are more interested in whether they can service the debt going forward and give precedence to those future forecasts.”
Jim is keen to get the message out across the North West business community that River Capital has both the funds and the appetite to back the right deals. They often get referrals from corporate finance firms such as Langtons and DSG.
But Jim is concerned too many people will make the bank their first port of call and when they hear “computer says no” will then be unsure of other options.
He also points out the importance River Capital places on building a strong relationship with the client that goes beyond just a transaction and becomes a partnership.
“Obviously the corporate finance sector knows about us, but we want to get the message out to other people in the business community,” he said.
There can be a number of reasons for an MBO but one of the most common is when a business founder or owner reaches retirement age and feels ready to pass on the baton to a new generation.
Jim explained: “They usually want to pass it on to the senior management team who may or may not have a small shareholding already, which is usually a safer avenue for business continuity.
“It tends to be a younger management team taking over. The good thing about that is they will already be engaged with the business as opposed to a management buy-in, which is someone from outside. They can be a little more risky.”
How long a deal can take varies but the typical length of time is eight to 10 weeks, although as little as six weeks is also not unheard of. To keep transaction costs down Jim and the team will keep due diligence in-house.
He also advises that people looking to sell a business should engage with advisors and River Capital will in advance of planned execution dates, helping to ensure the quicker smooth outcome at the business end of the deal.
Most of River Capital’s MBO deals are loan-only. Jim added: “On the debt MBOs we don’t take any equity. All that sits with the buyers and we are backing them with a repayable loan at commercial terms.
“When we back an MBO we will want to see them already posting decent numbers. A five-year loan of £500,000 and you are looking at repayments with interest of around £140,000 a year, so the business has to be generating the money over and above that.”
River Capital is sector-agnostic when it comes to MBOs and Jim says they have happily worked across multiple sectors. Recently there has been a run of financial services firms but he has also seen deals in sectors including manufacturing, advanced manufacturing, digital and IT.
For founders, selling the business they have nurtured can be an emotional decision, but Jim says more often than not they are keen for the new management team to succeed.
“We are dealing with the buyers rather than the vendors but what we notice about a lot of these deals is how friendly they often are,” he explained.
“I have walked into the room to meet the purchasing team, and the vendor is there as well. It may feel a bit awkward, but the buyers are happy for the vendor to be in there.
“The vendor is often keen to see the new team succeed and may even be staying on in the business in some capacity to support that transition. So, they have a vested interest especially if they have deferred capital. They want to make sure they get their money.
“If they are staying on during transition that can sometimes help to sweeten the deal.”
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