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Why you should consider a cash out deal to sell your business

Why you should consider a & lsquo;cash out’ deal to sell your business

By Peter Cromarty, Bibby Financial Services Sunderland

Generating growth in a flat economy is one of the toughest challenges facing many business owners at the moment, as the UK struggles to move out of recession.

Despite pledges from the Government and banks to support businesses, many still feel that access to finance is an issue as traditional sources of funding have not delivered the required level of funding.

This is, however, not to say that there is no good news for business owners. We have seen an increasing role being played by providers of alternative finance options, such as asset-based funding, which is a more specialist, focussed solution.

More and more businesses are realising the value of exploring the possible funding options, such as invoice finance, not only to support cash flow but also to generate capital for business investment or to assist with a management buyout.

Another important role for invoice finance is in the process of selling a business, particularly in such a challenging market. Business owners may consider a & lsquo;cash out’ solution if the valuation of their business is more than any potential purchaser is able to pay.

It is also an option if the business has available equity as well as being profitable and cash generative.

The corporate finance market has found it tough over recent years to match vendor expectations on valuation with purchasers’ ability or willingness to pay that amount.

This leaves potential vendors with a difficult decision, either to reduce the price which they are often unwilling to do, or to leave an amount on a & lsquo;deferred consideration’ basis, which will be repaid over the following few years.

Some vendors are uncomfortable with this approach because they lose control of the running of their business as the new management team takes over.

This is one of the main reasons that a & lsquo;cash out’ transaction may be an option for many businesses. This is where the existing owner refinances the business to take an amount of cash out in the form of a dividend.

As the business continues to generate cash over the following years, the debt is repaid, and the business can be marketed again at a lower value, increasing the chances of a successful sale.

This figure combined with the cash taken out in previous years should result in a satisfactory return for the vendors, more in line with their initial valuation.

This is a great example of a bespoke solution required to help businesses overcome the challenges faced by SMEs in the North East and, indeed throughout the UK.

It also underlines just how important it is for business owners to be aware of all funding options available, with firms such as Bibby Financial Services working hard to ensure SMEs can achieve their goals by providing financial support at the right time.


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