The merger and acquisition market has remained active over the last several years, despite the challenging times in which we all do business, Admittedly, a percentage of transactions, that might have completed in easier times, have not done so. Tim Sadka, Head of our Corporate Team, considers the issues further.

Such failures are often the result of (1) debt finance not being available or on terms that are not commercially attractive to the participants and/or (2) businesses having risk profiles and practices which do not meet the higher standards of due diligence which have evolved in recent times.  

The risks of transactions falling over at the due diligence stage has led to increased client interest in reviewing activities well in advance of a transaction and we are increasingly involved in pre-exit grooming exercises, working with clients and other advisors, to ensure all risks are identified and managed in advance of an exit process.

Aside from the broad due diligence risk, market forces and best practice have adjusted to the prevailing environment. As a result some deals, which might otherwise have fallen away, have been saved with creative deal structures helping to bridge the funding gap. As Tim Sadka, Partner and Head of Corporate identifies, we have seen a trend towards “vendor initiated transactions” which include some or all of the following characteristics - realistic pricing, flexible payment terms and deferred consideration, often secured but ranking flexibly alongside other debt providers and vendor roll over of a percentage of the equity participation.

The vendor initiated route has many attractions for the vendor. Aside from facilitating the exit, partial re-investment in a business one understands can be a more attractive investment decision for a vendor otherwise looking to the equity and bond markets with uncertain and/or unexciting returns. Importantly, such transactions can be driven on favourable terms so far as warranty and indemnity risk of the vendor of a vendor initiated management buy out (“VIMBO”) compared to an arm’s length trade sale and likely a more stable transition of ownership can be delivered.

The increasing importance of VIMBO as an exit strategy is balanced by the need to anticipate challenges to a successful outcome. These challenges exist in exit deals generally and are:

(1) sourcing suitable funding

(2) ensuring management team has the right credentials and experience

(3) meeting vendor aspirations for a partial, staggered or complete equity exit and

(4) putting in place the right advisor team.

The Rawlison Butler team has extensive experience, established financial and advisory connections, and the resources to work with clients to meet the challenges to achieve successful outcomes. Our recent work on the VIMBO of the ANA Group supported by funding provided by Lloyds Banking Group is a case in point.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.