What would you do if you could take 1.5x EBITDA out of your business?

Do you ever sit back and think about how much your business is worth? And then do you think you don’t want to wait until you sell your business many years from now to realise your dream of going on a cruise, buying that yacht or villa abroad or simply buying a nicer car or upgrading your home? Whatever your dream is, would you be closer to achieving it if you could raise up to 1.5x EBITDA (or more) to take out of your business, whilst at the same time not burdening the company with a scary level of debt that has to be repaid?

If the answer is yes, then the next question is how would this be possible and how might I achieve it? In simple terms, drumroll please…it depends! Not necessarily the answer you might have thought would be written here, but we all know each business is unique, has its own business model and its own quirks specific to the sector.

All things being equal, trading businesses with negligible specific tangible assets (think software or consultancy businesses) should be able to raise 1.5x EBITDA comfortably, whilst businesses with more tangible assets (think manufacturing or infrastructure businesses) will have a different approach that ties debt to the tangible assets first. They could then raise more debt depending on the repayment profile of the existing loans.

It also depends how much debt Is already in the business and the market dynamics of the underlying sector, as well as on the strengths of the management team with readily available, easy to understand financial information. Some business may want to borrow more, or less, depending on their attitude to risk and the dynamics of their own business.

So, what type of situation would create a scenario where I may want to find out more about releasing cash that’s tied up in my business? Well, there are a number of reasons, the most common being:

• A company owner(s) or a group of shareholders wanting to partially cash out and enjoy the fruits of their years of hard work, whilst not wanting to sell their business yet
• To enable the exit of one or multiple shareholders with others remaining, a ‘buy out’
• To provide shares to the succession management team

The reasons behind these transactions are wide and varied, a few of which could be due to different ages of the shareholders and therefore retirement profiles, changes in personal circumstances, or simply commercial or strategic reasons.

What are the key benefits?

Depending on the scenario, the act of raising debt could provide a myriad of benefits, some strategic and some financial:
 

• If you’re the owner it could allow you to crystallise some of your wealth and enjoy some of the fruits of your labour and provide financial security, whilst still working hard to grow/maintain the business
• Older shareholder(s) could take a step back, partially or fully, allowing others (owners or succession management) to buy their shares
• If there are disagreements on strategy this could provide a means to resolve them, by buying the shares of one party or the other
• The transactions can be to pay out a shareholder or shareholders in similar or different amounts, or be a combination of payout to shareholders in part, full or zero (just in new shares issues to key management)

How do I finance these scenarios?

There are multiple ways, however, if a lump sum of cash is sought for Day One, then one of the most common ways is to raise debt within the business.

There is less reliance on stretching growth targets which would be key for a Private Equity solution and, at around 1.5x EBITDA, the debt quantum is usually comfortably serviceable given the lower amount required, and therefore has less risk attached.

Raising debt also allows more cash to be kept within the business and therefore lessen the trading risks rather than, in some cases, taking all the cash reserves off the balance sheet to achieve the same outcome.

If you would like to learn more about any of the above, please contact our Corporate Finance team here, who have advised on a significant number of similar scenarios and would be delighted to discuss your options with you.