Time to reconsider equity release?

The concept of Equity release (or ‘cash outs’) can incorporate many different types of transactions. The common aim however, is that it allows the shareholders to unlock some of the capital value of their business by using some of their liquidity (cash), but at the same time, maintaining majority ownership of the business.

Depending upon the specific requirements of the business, some cash out transactions can take the form of a partial exit for some or all of the existing shareholders, or a full exit for some but not all of the existing shareholders. It can involve a private equity fund taking a minority stake in the business, whilst some transactions can be funded entirely by additional bank debt.

In every case, it is imperative that cash outs are constructed in such a way so as to be tax efficient and meets the shareholders’ objectives. We have a recent transaction below which involved both Mitchell Charlesworth and MC Vanguard by way of illustration as to how a company can unlock working capital to grow.

Case Study

MC Vanguard were engaged by Med Imaging Healthcare Limited (MIH) who provide servicing, reactive maintenance, repair and sale of a range of diagnostic imaging equipment for the NHS, private health sector and dental markets. It employs 41 staff from its Knowsley headquarters and has a turnover of £4.5million.

Initially, MIH’s Managing Director Tim Dickinson and his family received an approach from a potential trade acquirer for the Share Capital of the Company. Tim and his family owned 100% of the Company’s share capital.

Whilst exiting the business at the time of the enquiry was not necessarily on the agenda, the Managing Director was prepared to explore the approach if it transpired that the deal structure was an attractive enough proposition, but at the same time was sensitive to wasting precious time on an unsuccessful transaction, at a time when MIH was in a critical phase of it’s growth plan. Wishing to validate the approach, the Managing Director instructed Mitchell Charlesworth Partner Rob Davies, to discuss how he should respond to the approach? Rob recommended that Tim instruct MC Vanguard.

How did MC Vanguard help?

As part of the initial scope of their work MC Vanguard addressed the following key issues:

  • Did the original offer and deal structure come with a strong covenant?
  • Was this the best offer and structure that the Shareholders could drive at this time?
  • Did the Managing Director and his family truly want to sell, and if not, what investment / funding alternatives were available to support their growth plan?

What did MC Vanguard achieve?

Within three months of being appointed, and working in conjunction with Tim and his family, MC Vanguard had achieved the following outcomes:

  • Whilst the original interested party was a credible acquirer, it soon became clear that they could not complete the deal as quickly as first intimated as they were involved in making other acquisitions with a higher priority.
  • Following a number of discreet approaches, MC Vanguard were able to confirm the Company was of significant interest to other strategic trade acquirers as a result of its market position.
  • Most significantly, MIH was of interest to Equity funds seeking investments in the healthcare market.

What happened next?

It was clear throughout the initial phase of work with MC Vanguard that Tim and his family were uncomfortable selling MIH without having achieved their growth objectives.

As discussions with Equity funders evolved, Tim was pleased to learn that he could release a significant amount of cash via this route whilst still retaining a majority stake in MIH.

So despite significant trade interest, Tim and his family were able to sell a minority stake in the Company to Foresight Group’s Regional Investment Fund.

Key Benefits of the transaction?

By adopting the cash out route, Tim and his family have been able to:

  • Minimise the risk in their personal financial positions.
  • Secure additional finance required to achieve their growth plan.
  • Bring on board an investment partner who is not only aligned with their exit strategy, but will also provide additional credibility at the time of exit.
  • Draw upon the knowledge of the investment partner who can provide additional expertise and support through their own portfolio and detailed knowledge of the sector.
  • Take comfort from the fact that their investment partner will have resources to support further growth, be it organically or through acquisition.

If you would like to find out more about how Cash Out / Growth Funding structures could benefit you and your business please contact Jerry Scriven.

Registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales and authorised and regulated by the Financial Conduct Authority for investment business