Why we want to raise awareness around the benefits of accessing finance to fund an EOT transition | ThinCats guest blog
Guest blog by Mike Dinnell, Director of Regional Business Development, ThinCats
I was delighted to represent ThinCats at the 2022 EOA Annual Conference – where I was able to speak to many of the 670 delegates from our exhibition stand and also during the panel discussion I took part in, which explored your options for accessing finance to transition to employee ownership or as an existing EO business.
During the two days, I had a lot of people ask me ‘why would we go down a funding route?’ Often people don’t think about funding as an option, they don’t think there are lenders out there that will come in and support an employee ownership trust (EOT) transaction and accelerate the cash out element to the owners.
We want to raise awareness and make sure people think about funding as an alternative.
Why would you use funding?
When I was asked this, I said anything you think about in life where you are using funding, whether it’s buying a house, vehicle or business, you are essentially providing money in an accelerated way.
Looking at the differences between an EOT transaction and a management buyout from a funding perspective, you expect an MBO team to put some contribution into any purchase of the business. You’re not going to get that from an EOT, you’re not going to get everyone foregoing their salary or savings to help fund the purchase.
For an EOT, owners may have to wait five, 10 or more years to get the vendor loan repaid, but often they won’t want to wait and, to get an initial payment on day one, they may cash sweep the business and put it at risk by removing a lot of liquidity off the balance sheet.
An important question to ask with any transaction, not just an EOT, is ‘what does that opening balance sheet look like?’ So, if you’ve got £1million on the balance sheet, if they take £800,000 off that then the business has only got £200,000 and is that amount enough for working capital for the next few months?
Sometimes people can get that wrong and that’s where a funder can come in and make sure you’ve got enough liquidity – we can help by saying ‘actually, you can get a larger sum out in an upfront payment’.
Worries over the economy
People were also asking a lot about the economy and whether it’s good timing to take on finance to fund an EOT with what’s going on in the world.
With interest rates looking like they’re going upwards that does put pressure on a business, but if it’s the right timing for the business to do the EOT, then it’s the right time to fund it.
What’s in our gift is how we structure the repayments. We can change these to suit the business to make sure it’s still generating good cash, which means the business is paying back a more palatable repayment regardless of what’s going on in the interest-rate environment.
Viability of the business
Another question was ‘what type of security do we take?’ Well, we don’t take additional security, I will not ask you and your employees to sign a document to say their house is on the line or they’ve got a personal guarantee or anything like that.
We call it cashflow lending because we’re not taking security, it’s unsecured lending. We lend on the viability of the business, not against the assets a business has like property or machinery.
For us, it’s about doing due diligence, checking the numbers work and having a predictability element – we only lend to businesses that we know can pay us back.
Providing a solution
There’s no black art to what we do, it’s a solution that can help both the vendor and EOT team get a better deal.
I will tell a vendor they’re going to get more money out day one because we’re going to help the EOT fund the transaction, while I’ll be saying to the EOT team that if we provide funding they can go to the vendor and tell them they can give them an extra £1million day one and then maybe the purchase price of the EOT will come down, which can be game-changing.
Ideally, you want everyone to be having that conversation together – making sure everyone is on the same page in an open discussion is always the best thing to ensure you get the right deal for all parties.
This is why my top tip is always to get us involved early in the process. We will only fund any transaction where we know the business is in a good place and we won’t over-leverage a business with debt. We have to do it at a level that is comfortable for the business, so we need to be involved in the process early to assess what is best for the business.
Mike Dinnell is representing ThinCats at an EOA virtual webinar titled ‘An Introduction to Employee Ownership’ on November 2. Find out more or register here >>
ThinCats’ slogan is ‘helping the mid-size thrive’, citing how mid-sized SMEs often struggle to access the finance they need and that it ‘exists to fill this gap’ by providing long-term funding. ThinCats is a supporter member of the EOA having helped fund numerous businesses transition to EOT status through the creation of bespoke funding solutions. Find out more >>