Filling in the gaps in the safety net

Today's the day that the government's Job Retention Scheme gets going in earnest with the portal open for firms to apply for payment.   And the word Furlough has well and truly re-entered the language with many firms already having Furloughed staff, and which will now be applying to get the grants.  I know that my tax colleagues have been active today helping with this.

If you were being unkind you'd say that that government's support for business whilst swift and very welcome was full of gaps.  These are gradually being filled.  The Corona Business Interuption Loan Scheme (CBILs) was onerous in terms of the guarantees required from business.  But now the guarantee requirements have been softened.  Then there was a gap above CBILs and below the Corvid Corporate Financing Facility for larger businesses.  This has now been filled with the Coronavirus Large Business Interruption Loan Scheme (CLBILS) .  Incidentally why the confused approach to naming these, one's Coronavirus, and other Corvid?

All this still leaves a gap for businesses that don't pass the viability test for CBILs - ie that it would have been viable in 2019 and will be in 2021.  Such businesses are going to have to look to other sources of finance, including the various tax related supports that have been made available, and negotiations with their creditors.  Expect to see the insolvency practitioners busy with a rash of CVAs, prepacks and phoenixes in the Autumn for those firms that can get through until then.

And yesterday the Chancellor announced a £1.25Bn rescue package for start-ups.  He intends to grant c£750m to start-ups through Innovate UK's network of funds.  And to set up the Future Fund which will channel £500m via the British Business Bank to suitable candidates.  Cleverly the loans are conditional on private investors putting in 50% of the money, which should help to filter out the lost causes.  The government will have some kind of equity conversion after three years unless the loans are repaid.  That either means that they'll be left with equity in no hopers, or will have soft conversion rights - or new investors would surely take them out.  But I guess that's a small issue compared with the other burdens the treasury is taking on to support business.

This must be welcome news for venture capital / private equity funds which I know have been closely monitoring their portfolio investments through this crisis.

So the safety net probably still has holes in it - but at least they're becoming fewer.  It'd be nice however if the gaps could  be filled before business groups have to start lobbying as was the case with the start-up community which looked enviously at the generous support in places like Germany, and lobbied hard for this.

We have a Corona Virus hub on our website with lots of information and also practical insights on how to access the right funds.

If you're grappling with how best to access this support, or would simply like to discuss your strategy, get in touch - I'd be interested to hear how you're tackling it.  


Unreliable forecasts - and how to spot them


Like Hercule Poirot you should be on the lookout for ulterior motivation.  Was the forecast prepared with one eye to selling the business (usually inflated) or getting a valuation for a matrimonial dispute (this often produces a low valuation if the business owner is the defendant).  Or perhaps it was prepared for bank funding – in which case be sure the bank will scrutinise and sensitise the forecast.

Forecasts graphPoor track record of forecasting

If the business has historically been poor at predicting its results which should it be different now?

The pattern of growth or margins look odd

It’s always possible to benchmark the figures against public companies or other data.  If the business producing the forecasts has wildly different growth rates, or margins one needs a good explanation as to why that should be.

Forecasts prepared in isolation by the finance director

The CFO or FD in the business needs to canvas inputs from the key mangers in the business before he or she can produce anything meaningful.

The forecast is based on a huge assumption

If there’s one or two huge assumptions that drive the forecast, such as being able to raise millions of pounds of equity finance, or winning a significant new contract then you should consider what happens if those assumptions don’t prove realistic.

Forecasts conjured out of thin air

Of course if there are no, or few, supporting assumptions to check out then the forecast will lack credibility.  I recently valued an early stage technology company where it quickly became clear that the forecasts beyond the first twelve months were just round figure guesses – so I had to discount them altogether in my appraisal.

No balance sheet

I do sometimes see forecasts based on a profit and loss account and some cash flow assumptions.     Without a balance sheet a vital logic check is missing.


Cambridge and East Anglia Businesses asked to think strategically about growth

Flyer_front_cover_Cambs_Oct15With the Cambridge and the East of England economy continuing to perform strongly we're hosting a free educational morning seminar targeted at local small and medium size business owners (in the £1m-£100m turnover band).

Alongside our own corporate finance, and tax specialists we have speakers from our joint event hosts Barclays and Business Growth Fund who will give insights into raising debt and equity finance.   The whole event is designed to give business owners practical ideas on developing a strategy for growth.

Any acquisition should have a sound strategy underpinning it.   And it should look not only at the why and how, but also at the long term implications – when will you see benefits? Will it make your business more attractive to buyers?”

As well as giving advice on acquisition, we'll cover using strategic growth to maximise the value of a business.  The event is going to be comprehensive, guiding attendees from growth right through to succession or trade sale.

The seminar will run from 8.30am to 12.30pm at The Trinity Centre in Cambridge on 22 October. Registration is free; for more details or to book, please visit

Management buyout at Kloeber

KloeberI'm pleased to be able to report on a recent management buyout that we advised on.   Lee Green, Matt Higgs, Phil Dascombe and Dan Todd have acquired Kloeber, a manufacturer and supplier of glazing products. 

Based in Somersham in Cambridgeshire, Kloeber is a manufacturer and supplier of glazing products - including bi-folding, sliding and entrance doors, windows, roof lights and bespoke glazed screens.

It has had a lot of attention in the media, with its products featuring on TV programs such as Grand Designs and DIY SOS. In 2012 the company’s signature ‘FunkyFront’ door – a contemporary take on entrance door design – received Build It magazine’s Best Joinery Product Award.

Very often management buyouts take place at long standing mature businesses.   In fact Kloeber has not been around that long, and its rapid growth is a real success story.  Launched in 2006, the company capitalised on the high demand for quality glazing products from the home improvement and self-build sectors.

Kloeber 2Despite a general decline in the UK window and door market, the bi-folding door market grew by 17% (to £43 million) in 2011, an expansion that greatly benefited Kloeber. Within the first year of trading the company had designed a full range of timber glazed products. It later added uPVC, composite and aluminium products to its range.

The management team having run the company on a daily basis for the past three yearsacquired the company from its founder Director, Gavin Morris who now wants to focus on his other business activities while retaining a reduced involvement and shareholding in Kloeber.

What is also noteworthy about the deal is the raising of raise finance from RBS in a still tight debt market - particularly for this type of buyout funding.

Legal advisers to the deal were Rob Matthews at Keystone Law for the vendor and Jason Williams at Hewitsons for the buyout team. Finance for the transaction was arranged by Steve Noon of RBS in Cambridge. 

How to make a Safe Acquisition

Buying a business can be difficult enough, but that’s just the easy part. You’ll sleep in the bed you made. ChecklistMany an acquisition has turned to nightmare because of mistakes made during the purchase. Don’t let it happen to you.   Here’s some thoughts from our M&A experiences of both buying businesses and company sales to help you avoid the key pitfalls.

Seller financing

Not only does seller financing help minimize the equity required, it provides ready and meaningful recourse in the event the seller breaches duties, obligation, representations or warranties. Try to get “right of offset.”

If you can purchase assets instead of shares

Buying shares can be more risky, and you will need to conduct some due diligence on tgeh company you’re buying.  Its easier if you can negotiate to only buy the aseest. Asset purchases also reduce taxes.   But of course its much less tax advantageous to the seller, and most sellers will insist on a share sale or a greater price to compensate.

Reasonable returns

If the business can’t safely pay, beginning on day one, a resasonable return to you and comfortably service your debt and equity financing then you’re paying too much.  Remember that the bank that's helping to fund your deal will want to see a detailed business plan, and to agree financial covenants that are robust before supporting you.    And if you're raising Private Equity finance they'll also want to scrutinise the returns profile closely.

A clear, actionable penalty for every seller promise

Seller promises are frankly meaningless if your agreement doesn’t have specific, clear, actionable and valuable recourse outlined for each.  Make sure you're corporate lawyer has this all covered in the Sale and Purchase Agreement.

Verify seller’s ownership and rights to sell

Don’t trust that the owner legally owns anything, especially intellectual rights like trademarks, trade names, web domains, websites, formulas, patents, copyrights, etc.

Ensure that the non-compete is enforceable

No matter how sick or old or ill or tired or incompetent the seller says he is, nor how far away he says he’s moving, get a non-compete that your competent lawyer says is enforceable.

Pay no more than can be comfortably serviced by proven, historical cash flow

By all means count up all the synergies and cost reductions you think you’ll enjoy post completion, but try to pay only for the profits that are historically stable and proven.

Get personal recourse for seller breaches

For each and every promise, get the seller to agree to be held personally liable for any breach.

New, valid, lease on key property

Don’t  assume that the landlord will renew the lease or keep the same terms. Get it in writing!

 List the three things that could put you out of business the fastest

And be prepared to answer the question: “When the worst happens, how will I survive?” Don’t accept, “it’s unlikely to occur,” as an answer. If it “could,” you better plan for it.

Much of this is  common sense, but its amazing how people push through acquisitions only to regret them afterwards – I can think of a few examples in Cambridge and around East Anglia where folk have got this wrong, but there are some really glaring corporate horror stories out there in the UK banking sector.  Royal Bank of Scotland, Lloyds Bank and Coop Bank probably all wish they’d not done the deal!   But if you take your time and work with an M&A adviser and corporate lawyer who will challenge you on all the key points – even if it means telling you not to do the deal, then you’ll be fine.

Everything you've ever wanted to know about LIE-BOR

LIBOWe all now know that bankers have manipulated LIBOR and been caught doing it.  But why does it matter and why would the United States be worried about LIBOR? It's London Interbank Offer Rate after all?

Its because LIBOR influences a wide range of products across 10 global currencies. It sets the basic interest rate for products in the United Kingdom, Europe, much of Asia and to some extent in the
US.   So we’re lucky to have branded it "London", because there is a separate daily "LIBOR" rate,
for each currency involved.

Private banks (like Barclays, RBS and others) report the rates at which they believe they could get borrowing from other banks. The estimates are collated and published each day, setting the basic
interest rate from which all others are calculated. 

Falsely reporting LIBOR is the equivalent of a consultant heart surgeon lying about a patient’s blood pressure to make the results of his treatment look impressive.

So how does it work? How are Libor Rates Calculated?  The British Bankers' Association selects "panel banks" which are asked how much interest they think they would be charged by other banks if they were to borrow money in certain currencies and over certain periods of time. These panel, or "contributor banks", submit their perceived borrowing rates daily. Reuters collects the rate information from all contributor banks and produces an adjusted average.  Depending on the currency involved with the rate, there are 7 to 18 contributor banks.

The current 18 panel banks for the US Dollar include US, Canadian, German, Japanese, Swiss and amongst others, Barclays, HSBC, Lloyds and RBS. This is why the US regulator was sufficiently cheesed off to fine in the States, at the same time as the UK FSA fined banks at home.

Neither Barclays nor RBS could have influenced LIBOR on their own - that required collusion between banks. This collusion moved rates up or down over a period of years and helped enhance individuals bonuses and bank profits/reputation. Later, during the financial crisis, banks wanted to appear healthy, so they submitted lower borrowing rates than they could actually achieve which showed their reputation / credit in the market in a better light than they merited.

With acknowledgements to David Corneilus of Bishop Fleming (a fellow Kreston member firm to PEM) upon whose excellent and more detailed post this is based. 


What went wrong - Europe and the Banks

Broken-bank1Helga is the proprietor of a bar. She realises that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem she comes up with a new marketing plan that allows her customers to drink now, but paylater.

Helga keeps track of the drinks consumed on a ledger (thereby granting the customers' loans). Word gets around about Helga's "drink now, pay later"marketing strategy and, as a result, increasing numbers of customers flood into Helga's bar. Soon she has the largest sales volume for any bar
in town.

By providing her customers freedom from immediate payment demands Helga gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer - the most consumed beverages.

Consequently, Helga's gross sales volumes and paper profits increase massively. A young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets and increases Helga's borrowing limit. He sees no reason for any undue concern, since he has the
debts of the unemployed alcoholics as collateral.

He is rewarded with a six figure bonus.

At the bank's corporate headquarters, expert traders figure a way to make huge commissions, and Helga barmaidtransform these customer loans into DRINKBONDS. These "securities" are then bundled and traded on international securities markets.

Naive investors don't really understand that the securities being sold to them as "AA Secured Bonds" are really debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.

The traders all receive a six figure bonus.

One day, even though the bond prices are still climbing,a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Helga's bar. He so informs Helga. Helga then demands payment from her alcoholic patrons but, being unemployed alcoholics, they cannot pay back their drinking debts.Since Helga cannot fulfil her loan obligations she is forced into bankruptcy. The bar closes and Helga's 11 employees lose their jobs.

Overnight, DRINKBOND prices drop by 90%. The collapsed bond asset value destroys the bank's liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community. 

The suppliers of Helga's bar had granted her generous payment extensions and had invested their firms' pension funds in the BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy,
closing the doors on a family business that had endured for three generations; her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and
bailed out by a multibillion dollar no-strings attached cash infusion from the government.

They all receive a six figure bonus.

The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who've never been in Helga's bar.

Acknowledgement is due to James Lawson of Intralink for the above wise words on our the root casues of the present troubles in our financial systems

Are the banks open for business - lending to SMEs

The Institute of Chartered Accoutants of Scotland recently put together a response to the UK government on the availability of bank fuding for SMEs.    This contains quite a few interesting points, but I was particularly taken on the point about communication.  The banks all say the are "open for business".  And indeed they are - but they're less good at communicating to the SME community what constitutes good, or even tolerably bankable opportunities.  The following quote from the report encapsulates it neatly.


"If the lending landscape has changed and those businesses that see themselves as “viable” have in fact been “downgraded” by the banks to below that line – there must be clear and concise public communication by the banks to let businesses and their advisors know what the playing field is – never mind having it level.

I hope this does not degenerate into the banks looking upon this as “competitive advantage” territory and thus reluctant and/or unwilling to make public what they consider to be “viable” – this will not help and may lead to another “bank-bashing” session – which will also not help.

Banks need to make sure that their staff – from those who are initially contacted to the ultimate decision makers – are well versed in what they are looking for from those SME businesses that approach it for funding. They also must ensure that they apply those principles on a fair and consistent basis."

This explains some of our recent experiences in funding management buyouts and M&A transactions.    We have found that banks have variously changed their criteria for the size of transaction they'll look at for a cash flow loan to support and MBO.   Also many have quite a different outlook for a potential borrower that  is "new to bank".   And its not enough to have a long standing relationship.   One major UK bank which shall remain nameless (clue dark equine logo on a blue and green background) normally known for being particularly good  at supporting its existing customers turned down such an opportunity pretty brusquely.  The reason was actually scale - but the way it was "rejected" has probably lost it the relationship whatever the outcome of the MBO and quite unneccesarily so.


Just losing momentum or double dip?

The Ernst & Young Item club – which uses the Treasury's economic model to make its predictions  - suggests  that the private sector will struggle to absorb the hundreds of thousands of jobs shed by the public sector over the coming four years.     However Peter Spencer, chief economist for the Item club, said that it was unlikely that the loss of momentum in the economy over the next six months would lead to a full-blown double-dip recession. 

But at the same time the ICAEW Business Confidence Monitor says that "Business confidence has weakened significantly as businesses acknowledge the path to recovery contains further challenges, with a fast return to strong growth by no means guaranteed".  In fact the Monitor showed its first dip this quarter since Q1 2009. 

At PEM Corporate Finance we saw an upswing in M&A activity last year closely correlated with the upturn in the Monitor.   Let's hope the relatively modest decline in Q3 2010 doesn't pressage an erosion of confidence in the M&A Market.  After all, liquidity concerns have eased, and the mismatch between vendor and buyer price expectations has lessened significantly.


More Potential Buyers than Willing Sellers - M&A Activity set to increase in 2010

Can one plus one ever equal three?  Yes it can.  If you are selling your business - find a strategic buyer which will enjoy synergies from combining the businesses and which knows it is in competition to buy and you can maximise value and share in the marriage value. 

One plus one equals three What are the chances of pulling this off in the current climate?  Most recent surveys of corporate opinion show that firms are far more likely to engage in M&A activity over the coming year.  E&Y found 57% were more likely to make an acquisition while within BDO’s rather more “gung-ho” sample 80% felt the same.  Regardless of numbers it’s quite clear that there is a much greater appetite for deals this year.

Deals will be concluded by strong businesses with clear strategic intent, although some of those surveyed did admit to opportunism as a motivator and to being on the look out for bargains.  The biggest hurdle is likely to be discrepancies between buyer and seller valuation expectations – however as the market improves, and the volume of transactions increases, this is likely to even out.

There is evidence that strategic acquirers who have been deferring M&A activity while profitability recovers are now sitting on their largest cash reserves in recent years.  Add to this Private Equity investors who also have cash to burn before the time expiry of funds with a finite end date and you have a much better prognosis for those seeking to sell their business than for many months.  The return of strategic buyers and increased competition should drive an increase in activity and valuations.

The ability of purchasers to fund deals from their own cash resources is still a key factor – for example Corpfin found that the majority of UK deals in April 2010 were funded by buyers existing cash resources.  However they also found that the second largest source of funding for such deals was bank debt.  So liquidity is once again available for the right deals.

Owner managers who have been planning an exit but have had to put their plans on hold during the financial crisis can now start planning for exit.  Now is the time to consider grooming the business for sale in the short or medium term.  Now is the time to give consideration to the preparation of an exit strategy – which should cover the following issues:

· What are the personal or corporate objectives of the owners?

· What’s the business worth now?

· At what valuation would the owners be prepared to sell?

· What are the prospects for the business?

· What drives value in the business?

· What will a likely potential buyer for the business look like?

· How must the business look to maximise sale value in the future?

· What could get in the way of an exit or reduce future value?

At PEM Corporate Finance we have seen a marked increase in the number of enquiries from businesses planning for exit.  And there is also plenty of appetite from local businesses to make acquisitions – we have recently advised the purchaser in transactions such as the purchase of ISIS Fertility by Bourn Hall Clinic, the acquisition of Elmy Landscapes by Flora-tec and the MBO from Stratech Scientific of Molecular Dimensions.   

If you are exit planning it’s worth getting an outside opinion on the valuation of the business, and on opportunities to groom it in order to increase exit value.  Grooming is aimed at closing the gap between the current value of the business and the target exit valuation.  It should avoid the risk of a sale at undervalue.