‘This could be the best or the stupidest thing we ever do,’ I said to my business partner, as we went to see our solicitor.
It was February and we were on the way to complete a management buyout to own 100 per cent of the digital consultancy we’d founded. We’d been told we’d never get the finance, and the UK was in the worst recession since, well, ever. Yet here we were, taking a big risk and borrowing an awful lot of money from a bank and other sources.
Luckily, it was the best thing we ever did. Ten months have passed, we’ve gone from strength to strength, paid off one of our creditors already and our bank has asked if we want to borrow more.
I’m sure many creative businesses have found it hard to borrow money recently. During a recession the creative sector is always viewed with particular scepticism. Your revenues most likely come from marketing budgets, which are the first to go in a downturn.
As a digital business, it can be even harder, as many lenders believe we’re making black magic, and if you don’t make a physical product you’re not a proper business.
So how did we do it? Normally, there are two main routes to a buyout: borrow a substantial amount of money, topped up with your own funds and own 100 per cent, or find an equity partner (ie sell shares in your new business) who provides the finance and you own a lesser amount. We wanted to own the business outright, so had to borrow.
The key was accepting that most sources of finance are very risk-averse at the moment and don’t want to be the sole source of funding. So before you start you have to be in good shape, which means having solid client relationships, healthy profits and good cashflow – areas we’d always paid close attention to. Also, seeking several sources of funding reduces everyone’s risk, and most lenders take comfort from someone else having already looked at it and decided to support you.
Strangely enough, our first source of funding was our existing shareholders. Many MBOs don’t involve the existing shareholders being paid off on day one. In many cases, shareholders will leave loan notes behind rather than being paid cash, particularly now with interest rates so low it’s not worth them taking the money and putting it in the bank.
Even with the shareholders on board, we still had a lot of money to find. Our first stop was the bank we’d been with for more than ten years. We had an initial meeting, which was very positive, but within a week worldwide inter-bank lending had closed down and we were told it wouldn’t touch us. We were devastated.
After calling in a few personal contacts, we spoke to another bank that was more helpful, but would only lend us part of the money. Getting the bank to back us was very tough. All the old rules still applied – we’d looked after the basics such as good clients, solid growth, healthy profit margin and solid cashflow. The man we have to thank the most is our bank manager (no, really). He believed in us and was willing to listen to our case that the digital industry would still grow during the recession.
The final part of the finance came from an unlikely source, one many businesses rule out – invoice finance. This involves someone lending money that clients still owe. Like most consultancies, we invoice clients and wait, anything from 30 days to forever, to get paid. An invoice finance company will advance you most of your outstanding invoices, which unlocks substantial funds. Most view invoice finance as something to ease cashflow, so it was very unusual wanting to use it to fund an MBO.
It was a great idea, but finding a company willing to support us was even tougher than finding a bank. Most invoice finance companies will happily support a business if you sell a physical product – if we sold staples it would have been easy. If you’re a consultancy that works on long projects and invoices in stages, it’s a minefield. After speaking to more than 15 companies that wouldn’t give us the time of day, we found a small invoice finance company that was willing to help.
The final piece of the puzzle was having a good solicitor and good accountants, people who understand you and your business. Ours were fantastic and made it all possible.
Without doubt, it’s tough to raise finance in the current climate, but don’t let that put you off. If you’re a good business and are determined, financing a buyout or major expansion is possible.
Raising finance in tough times
- Ensure you’re a good business to lend to by looking after the basics: client relationships, profitability, debtors and cashflow
- Don’t be put off at the first hurdle – every lender is different
- Invoice finance is a great way of raising finance for expansion
- Show the bank financial projections you can over-deliver on, so it’ll trust you and you’ll always have good news to tell them
- Good advisers and brokers make a huge difference, and often come with vital contacts