In the current market it is proving very difficult for parties to access external bank finance to assist in the funding of company acquisitions. There are, however, some situations where with careful structuring the Vendors of the company can act as the funder by allowing for the payment of at least part of the purchase consideration on a deferred basis.
Historically, this type of transaction - often referred to as the VIMBO (a Vendor Inspired Management Buy Out) - has worked well in situations where there was either a management succession (management buy-out) or a family succession (power changing hands to the next generation in a family business). There is no inherent reason why this type of deal should not be utilised currently to facilitate company disposals in other more general circumstances.
One of the features of this type of transaction is that the Vendors will look for meaningful security for their deferred consideration from the resources to hand. For example, personal guarantees from the purchasers (if individuals) or from those individuals behind any Newco used as a vehicle for the purchase.
Alternatively (or in addition), the Vendors may look for some form of security from the company which they are selling, for example, a Standard Security over its property and/or Bond and Floating Charge over its assets and undertaking.
Until recently, this sort of arrangement constituted “financial assistance” and was illegal unless a strict statutory procedure called a “whitewash” was properly undertaken. However, since 1 October 2008, the prohibition on a private company providing financial assistance for the purposes of the acquisition of shares in itself or another private company has been repealed. This should make “self funding” transactions easier and significantly more cost effective to put in place, which is why this type of structure is particularly worthy of consideration.
It should be noted that the directors of the target company will still have to fulfil their fiduciary duties and give careful consideration to, and justification for, the ability of the company to give financial assistance and the commercial benefit that the company will derive from the arrangements under contemplation.
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Alastair Dunn
(Information posted in December 2008 may not have been updated at time of reading).