Using debtor finance to fund a management buyout

This stress is also evident if the ownership transition involves a family business and the retiring family member wants to unlock maximum value while still being able to pass a viable business on to their children.

Debtor finance can be a great funding option to help facilitate a MBO, whether you are buying a company’s assets (including stock in trade, fixed assets, debtors and goodwill) or purchasing shares.

It is also a useful option if you are on the selling side, because having a debtor finance facility in place means the facility can be part of the sale, making it easier for the buyer to fund the purchase and provide ongoing working capital.

This can help bypass a capital raising, use of personal assets or time-consuming credit checks with the banks.

Two recent examples of how Scottish Pacific has partnered with SMEs to successfully implement MBOs are highlighted below, in the diverse industries of chemical manufacturing and video game distribution.

Finding the working capital to fund stock holdings

TBC Distribution is a national supplier of cleaning products for hospital, healthcare and industrial use. After managing True Blue Chemicals’ Wollongong branch for 12 years, Shane Leigh and his business partner Paul McGregor were given the opportunity to buy the business.

Paul and Shane were able to raise the capital required for the acquisition. However, it was a huge challenge finding the working capital to fund stock holdings of more than $1 million, with no additional security to offer.

The vendors were funding the business via a debtor finance facility they already had in place with one of the major banks – they suggested an introduction for Shane and Paul, but the bank indicated that the time frame of three weeks to finalise the transaction was too tight.

Scottish Pacific was recommended, and we committed to having the funding in place in time, ensuring the necessary working capital was in place for the newly acquired business. The outcome was an excellent MBO opportunity that did not have to be passed up due to lack of funding.

Two years on, following successful acquisitions of two more interstate businesses (both now funded by Scottish Pacific), TBC Distribution continues to grow.

Financing growth without tying up the family home

Another successful MBO funded by Scottish Pacific was that of gaming distribution business Five Star Games.

In 2012, the local management of Sega Australia wanted to do a MBO and acquire the distribution rights for Sega products.

The potential new owners had minimal capital and Sega wanted to be assured of getting paid.

As the business was essentially a start-up, there was no historic information available to prospective financiers.

The banks were not interested. However, debtor finance approval from Scottish Pacific helped Five Star Games management win the rights to products including Aliens, Football Manager, Sonic and Total War.

Limited shareholders’ funds were used to secure the first shipments, and then debtor finance was used for further stock purchases.

In the past year, Five Star Games has branched out to distribute other publishers’ games, including The Walking Dead, and they continue to supply major retailers such as EB Games, JB Hi-Fi, Kmart, Target and Big W.

“Debtor finance was a godsend for us, and until we got involved, we really didn’t realise how good a product it was,” Five Star Games’ managing director Darren Macbeth said.

“It’s been a great way for us to free up cash flow. We were looking to finance $2 million in purchases, and were going through all the start-up/SME business finance options.

“Debtor finance was a great way to finance our growth without tying up our house.”

As well as facilitating MBOs, debtor finance is often used to help clients successfully complete mergers and acquisitions. For brokers with clients seeking MBO and M&A opportunities, it is definitely a funding solution that should be considered.