the colour of money · insider november 2010 17 pros: it’s relatively quick – as quick as the...

insider NOVEMBER 2010 15

Your business has survived being

crushed by the credit crunch, wrecked

by recession and destroyed by debt

crisis. Now what’s your post-recession

strategy – and how are you going to fund it?

Many businesses in the South West are

looking to whether now is the time to devise

strategies that do more than look beyond the

next few weeks.

“We’re beginning to see businesses

expanding their planning horizons and

looking beyond the next quarter,” says

Richard Wallace, assistant regional director

year may be quite detailed,

they may have a three-year

strategy that is more

aspirational.”

No matter what plan

you have, you’re going to

need the finance to execute it, and therein

lies the greatest strategic challenge to many

businesses.

The days when they could extend a “vanilla”

overdraft with the bank after a chat with their

local manager are long gone. Instead many

companies have to stitch together a patch-

work quilt of funding options to cover their

immediate working capital and their expansion

plans.

“With restricted funding options, companies

will be well served by not relying on a single

source,” says Neil Greenaway, managing

director at Clifton Asset Management in

Clevedon. “It would be unwise to make a

guess on the long-term availability of funds.”

Armstrong adds: “Many businesses will

no longer get their funding from one source,

because overdraft facilities are now hard

to get.”

But what are those funding options that

need to be so skilfully interwoven, and

what are advantages and disadvantages of

each? Here Insider and a group of advisers

take you through some of the swatches of

finance available.

Angels

After the cash from friends, family and

fools come the business angels – private

investors who are prepared to take a

stake in a business by investing their own

cash. The South West, which has more

than its fair share of retired business

people, has a strong network of angels

contactable through organisations such

as Swain (the South West Angel and

Investor Network) and Devon Business

Angels.

DEALSFUNDING GUIDE

Angels

Pensionlending

Leveragedloans

Privateplacement

Flotations

Equityfinance

Asset

based

lending

The funding landscape for business is changing. KKuurrtt JJaaccoobbss looks at your options

for Clydesdale Bank. “For the small

and medium-sized enterprises

(SME) market this includes

long-term investment decisions.”

Richard Armstrong, corporate

finance director at accountancy

Francis Clark, has observed

something similar: “We’re seeing more

businesses looking beyond the short term.

Often it’s not a single strategy but a series of

options – plan A, plan B, plan C – to guide

them through changes and over different

lengths of time. So while a plan for the next

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Pros: It’s relatively quick – as quick as the

individuals willing to back you are prepared to

commit. Along with the money also comes

experience and advice from investors who

really know what they’re talking about.

Cons: Angel investment means giving away

a stake of the business to relative strangers.

It also increases the risk of being lumbered

with outsiders who insist on taking an active

part in the business, whether wanted or not.

Because angel investments are usually high

risk, investors are usually looking for high

returns, so performance is all.

Asset-based lending

“Businesses are looking at asset-based

lending as the viable alternative to traditional

funding because it really sweats a company’s

assets, making them bring in cash,” says

Kelvin Thomas, regional director of Venture

Finance. “It’s my belief that in a few years

asset-based lending will replace the

old-fashioned bank loan and the word overdraft

will be dead in the financial dictionary.”

Although plenty would disagree with this

assessment, asset finance has certainly

become more popular as other established

forms of funding become hard to access.

According to figures released by industry

body the Asset Based Finance Association in

September 2010, its members’ loans during

the second quarter of the year rose to

£14.59bn – up two per cent year-on-year.

From fairly basic beginnings such as

factoring, where companies effectively

handed over their debtor books to a lender,

asset-based lending has developed many

strange and varied strands, including invoice

discounting – similar to factoring but in which

the borrower keeps hold of the debtor book –

to financing secured by assets such as plant

and property.

Pros: It’s quick to arrange – typically 60 days

– and far easier to access than many other

types of finance. It’s also flexible, growing

with the fortunes of the business. It’s also

fairly ubiquitous – along with specialist

providers most banks now provide asset

finance. It also helps to smooth out cash flow

fluctuations.

Cons: Funding fluctuates, so when a

business hits trouble it may find that facilities

are reduced just when it needs them. Asset-

based lending also struggles to work in

certain sectors, notably construction, which

use staged payments rather than even cash

flows.

Equity finance

“The flavour of the month”. That’s what

Armstrong has to say about private equity

investments, and certainly the sector is

awash with serious amounts of cash looking

for homes. Private equity houses are no

longer just making one-off initial investments

in companies in which they have taken

stakes; they are reinvesting cash, particularly

in businesses that need funds for buy-and-

build acquisition strategies.

“Almost all private equity deals are

predicated on some moment of change or

potential change, such as a change of

ownership like a buyout or a major acquisition,

so it’s rare for private equity houses to invest

in a business that’s only looking to expand,”

says Dominic Ely, of NVM Private Equity.

“Equity funding is strategic: it’s for people

looking to develop a company through, say,

a buy-and-build strategy or a big acquisition.”

Pros: There’s lots about. Industry body the

British Venture Capital

Association says there is

about £10bn – yes, billion –

uninvested in UK-based

private and venture capital

funds. It is fairly secure

medium term – usually

three to five years – and

venture capitalist are

prepared to reinvest

repeatedly in companies

that are showing promise.

If a strategy involves big

change and big growth,

private equity is a serious

option.

Cons: There may be lots of private

equity cash around but only a tiny fraction of

that is likely to be invested in West Country

businesses. Venture capitalists expect

handsome rewards – annual returns on

investment of up to 40 per cent are not

unusual – and have been known to be fairly

interventionist when a management team is

seen to be underperforming. Many deals

made in the middle of the decade were

stuffed full of bank debt, although current

DEALSFUNDING GUIDE

“Equity funding is strategic:

it’s for people looking to

develop a company

through a buy-and-build

strategy or big aquisition.”

Dominic Ely

“We would give a three to

five-year loan but look on it

as, say, a 15-year strategy;

a rolling short-term debt

allied to a long-term

amortisation.”

Clive Hetherington

Equityfinance

Assetbasedlending

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18 insider NOVEMBER 2010

deals do not carry nearly so much gearing.

It’s not quick money either – most deals take

months to negotiate and involve a lot of fees.

Flotations

After years in which the South West had

seemingly turned against the London Stock

Exchange or its junior partner AIM, there have

been some notable flotations in the West

Country recently, such as Swindon car retailer

Cambria Automobiles, which joined AIM in a

£53m flotation, and Cheltenham-based

fashion business Supergroup joining the

main market with a £125m listing. As the

markets continue to calm, more West

Country companies are reportedly in the

pipeline for flotations.

Pros: You can raise serious amounts of cash.

The stock markets can be the gift that keeps

on giving – a company clearly on the rise

can return again and again to make fresh

issues to raise cash.

Cons: Flotations are not cheap – even the

cheapest on AIM could easily cost £500,000.

Plus, maintaining a position will set a

company back a hefty six-figure sum each

year. And a flotation isn’t fast – even the

smoothest initial public

offering is likely to take

about six months.

Leveraged loans

A leveraged loan is based

on profits. If a company

makes, say, £1m pre-tax

profit the bank may lend

£2.5m repayable over five

years at base rate plus a

margin.

Pros: Negotiations are through

your bank. It’s fairly long term and

secure.

Cons: Can take a long time to

secure, and that margin makes it

more expensive than ordinary debt.

Mezzanine finance

“Mezz” is the strange

lovechild born of a union

of debt and equity finance

– it’s a subordinated,

high-interest unsecured

loan that typically runs

between three to seven

years with a bullet

payment at the end.

Although still not a

common form of finance,

it’s becoming more available, with private

equity houses and some specialist firms,

normally London-based, willing to provide

funds. Mezzanine debt ranks above equity in

the payout queue but behind ordinary

secured loans.

“Mezzanine is not only more

expensive than normal bank

debt, you also usually need to

show that you have strong cash

flow projections before it will be

granted,” says David Roper,

director of corporate finance at

accountancy firm Smith &

Williamson.

Pros: For a

fast-growing

business

confident of

long-term

success,

mezzanine

finance can be

an excellent

funding

stream.

Cons: It’s

expensive, and

still not easy to access. The big

bullet payment at the end is a

worry for anyone taking on

mezzanine finance. Shareholders

find they are pushed further to

the back of the queue when it

comes to be paid. It also often involves big

numbers – “the main cheque size for

mezzanine is £10m,” says Ely.

Long-term bank debt

“It’s not easy for banks to provide long-term

deals,” admits Lloyds TSB’s corporate

markets area director Clive Hetherington.

“The reason Bank of Scotland and Northern

Rock got into trouble was because they lent

long but borrowed short. The way we would

look at it now is to give a three to five-year

loan but look on it as, say, a 15-year strategy

– a rolling short-term debt allied to a long-term

amortisation.”

Pros: It’s reliable: you know what it is, you

know how it works and, compared with other

forms of finance, it is relatively cheap.

Cons: Getting hold of it. Although many

banks would claim they are open for long

debt business, many of their customers and

other funding sources would beg to differ.

Pension lending

A still relatively uncommon form of finance

but one showing growth, which uses trust

mechanisms to secure finance through

pension arrangements. Greenaway says:

“Using pension-led funding alternatives has

proven resilient, and interest has been

growing steadily since the onset of the credit

crisis. Control of a business can be easily lost

when directors too easily give security over

company assets to lenders.”

Pros: Cheaper than traditional borrowing.

Controlling a patchwork of funders is often

simpler when one of the largest creditors is

the directors’ pension scheme.

Cons: It’s your pension...

Private placements

For many, private placements are a fairly new

form of finance, and as yet really available

only to larger businesses. In effect it’s going

to the US finance market to raise cash by

offering senior loans to a small group of

chosen investors, notably insurance and

pension funds.

Pros: It’s confidential, there’s no minimum

size, it's competitively priced and it’s flexible.

Cons: It’s not accessible to the majority of

businesses – we’re talking tens of millions of

pounds. If you’re a small business, you’ll have

to wait a while.

Revolving credit facility

A hybrid of bank overdraft and long-term loan

that allows business to repeatedly draw

down and repay amounts for short periods.

Pros: It’s more available than it was.

Cons: It’s a facility that banks usually only

extend to existing customers. The margins

charged have increased significantly, as have

arrangement fees.

DEALS FUNDING GUIDE

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DEALS

A BITE OF BRISTOLWho? Bristol-based 3D printer manufacturer

Bits from Bytes.

Did what? Has been snapped up by

Nasdaq-quoted US technology business

3D Systems.

How much? Both parties are keeping

stum.

What’s the background? Bits from Bytes

– a spin-out first conceived at Bath

University – was set up by Ian Adkins and

Iain Major two years ago and employs 13

people. The company makes 3D printers

that allow the user to ‘print’ a solid object

designed using computer-aided design

and manufacturing software.

Last year the company accounted for 17

per cent of all 3D printer sales worldwide.

This year Bits from Bytes launched the first

fully assembled 3D printer to be put on the

market for less than £2,000.

And the buyer? 3D Systems,

headquartered in Rock Hill, South Carolina,

makes rapid prototyping machines and

has a turnover of more than $100m.

Why did it buy it? 3D Systems president

Abe Reichental says: “With Bits from Bytes

in our portfolio we are able to address

more educational opportunities, capitalise

on the growth of the DIY market and

provide powerful, affordable creativity tools

to a broader audience than ever before.

“This acquisition fits nicely into our

strategic plans and will allow us to grow

our global presence, particularly in emerging

markets while boosting our profit.”

NORTH WEST PASSAGEWho? Ultimate Finance in Bristol.

Did what? Bought North West rival Ashley

Commercial Finance.

How much? An initial fee of £4.75m in

cash and shares that could rise depending

on performance.

What’s the background? Ultimate

Finance provides invoice discounting,

factoring, asset finance and trade finance

to small and medium-sized businesses –

in short it provides bridge finance to smaller

businesses. The company employs 60

people and has offices in Manchester and

Tunbridge Wells, in addition to its

headquarters in Bristol.

As Insider went to press, Ultimate

Finance had £14.2bn lent out. It says it has

benefited from the mainstream banking

sector’s restriction of many overdraft facilities

– forcing owners of smaller businesses to

look elsewhere. The company, which listed

on AIM eight years ago, has been looking

to expand via acquisition for a while.

Why did it plump for Ashley? Ultimate

Finance sees synergies in the tie-up.

Ashley Commercial Finance operates in

the same sphere and the deal strengthens

Ultimate’s presence in the North West.

How will it work? Ultimate Finance is

funding the deal with the proceeds of a

£2.75m share placing, priced at 12p per

share, and a new £2m acquisition finance

facility from Lloyds Banking Group. It is

paying an initial £3.7m of cash and

£1.05m of shares and could pay a further

£2.7m depending on the future performance

of Ashley Commercial Finance. The firm’s

27-strong team, who are based in

Cheadle, is moving into Ultimate Finance’s

Manchester office.

A good deal, then? Clive Garston, chairman

of Ultimate Finance, is over the moon.

“Among the many opportunities we have

seen over the years, Ashley stands out as

highly complementary. This is a

transformational acquisition allowing

Ultimate Finance to achieve scale and

synergistic benefits,” he says.

Anything more to tell about the finance?

Lloyds Bank has increased the funding

available to the enlarged group to £34m.

DEALDESPATCHES

TEST MARSHAL’S ANGELWho? Test Marshal, a technology company

in Bristol, which is pioneering innovative

ways to do essential tests on the life-saving

safety of electrical systems.

Did what? It’s been invested in by Horatio

Investments, a new £20m angel investment

fund in Glastonbury.

How much investment? Horatio will invest

£400,000 in the company for a 40 per cent

stake.

What’s the background? Horatio

Investments – a fund pooled by private

investors – was launched in September to

invest in small businesses and start-ups in

the South West.

Why Test Marshal? "We were immediately

impressed by the product and the team,”

says Martin Bowles, managing director of

Horatio. “They have been developing the

product for a few years and have protected

it. They just needed funding to complete the

testing and get it launched."

A good deal, then? Test Marshal’s managing

director Robin Stone is pleased as punch.

“We have been delighted with the support

Martin and the team at Horatio have been

able to offer us.” The company says

Horatio’s backing will enable it to launch its

product worldwide. Bowles says there had

already been interest in the product from

some FTSE 100 companies.


LOOKING NORTH AND EASTWho? Mole Valley Farmers, based in

Devon.

Did what? Has acquired Lincolnshire farming

retailer CWG.

What’s the background? Mole Valley

Farmers is a leading player in the animal

feed sector, selling nearly 500,000 tonnes

of feed every year. The business operates

nine retail branches in the South West at

the moment, and its subsidiary, Scats

Countrystores, has a further 19 stores

across the South and South East of

England.

Why CWG? Mole Valley said the acquisition

of CWG was a natural expansion of the

business into East England and the

Midlands.

Says who? Andrew Chapple, among others.

He’s company secretary and head of

finance for Mole Valley Farmers. “This deal

is an important milestone in the development

of our business,” he said.

What about the finance? Lloyds Banking

Group has stumped up the funds. Clive

Hetherington, South West area director for

Lloyds TSB Corporate Markets, says: “Mole

Valley Farmers is a fascinating business

run by an impressive management team.

We are pleased to have been able to provide

Andrew and his colleagues with the funding

they need.”

20 insider NOVEMBER 2010

How will it work? Bits from Bytes will

continue to manage its operations from its

headquarters in Clevedon.

What are the prospects? Ian Adkins,

founder of Bits from Bytes, says the deal

will allow him to expand the operation

across the world. “This is fantastic news for

the company and all those who work

here,” he said. “3D Systems is a major

player in the 3D printer market and it will

mean Bits from Bytes will be able to tap

into the technical knowledge and expertise

of the people who work there.

“The resources and financial backing of

3D Systems will also enable Bits from

Bytes to increase production and explore

ways to improve the existing technology,

letting us reach new audiences and new

geographic areas.”

LIFETIME ACHIEVEMENTWho? Lifetime, the training provider based

in Bristol.

Did what? Has acquired Rapido Training

in Gloucestershire, which provides

vocational training to people in the care

and childcare sector.

A good fit? Looks it. Rapido is a business

MORE OF MEARSWho? Social housing maintenance

company Mears in Gloucester.

Did what? Acquired Jackson Lloyd, a

social housing maintenance business in

the North West.

How much? The deal could be worth up

to £5.8m.

What’s the background? Jackson Lloyd,

which is headquartered in Skelmersdale,

operates in the same field as Mears and

says it has an order book in excess of £8m

of social housing maintenance contracts

in the North West. The company also has

offices in Salford and Preston.

How will it work? Mears will pay £2.7m in

cash and £2.1m in net debt repayments

for the company. Under the terms of the

deal, Jackson Lloyd’s 450 employees will

join Mears. An additional deferred

consideration of up to a maximum of £1m

is also tied to the deal, subject to

performance criteria.

A good deal, then? The acquisition is the

latest in a line of bolt-ons that Mears has

added to its business in the past few

years, swelling turnover to £600m and

staff count to more than 12,000.

The company’s chairman, Bob Holt

(pictured), is confident the group’s latest

buy will slot seamlessly into place. “The

acquisition of Jackson Lloyd fits comfortably

into our social housing division and broadens

our footprint in the North West of England,”

he says.

“I am delighted to welcome a further

450 employees into the group. We continue

to seek to acquire businesses with the

potential to meet the strategic objectives

of the group.”



DEALS

REGIONALDEALSSSoouurrccee:: Corpfin, a part of Experian, 2010

We have changed our data provider to Corpfinworldwide-Experian. If you don’t currently supply your deals to them and would like

your deals to feature in the monthly tables, you will need to send your announcements to [email protected]

A = ACCOUNTANT, C = CAPITAL, D = DEBT, B = BROKER, FA = FINANCIAL ADVISER, L = LAWYER

DDAATTEE DDEEAALL AADDVVIISSEERRSS

31/10/2010 (Pending) Acquisition of Air South West FA - Evolution Securities (London) (Sutton Harbour)Bidder: Eastern International AirlinesVendor: Sutton Harbour

30/09/2010 Acquisition of Clockwork Services A - Milsted Langdon (Taunton) (Clockwork Services)Bidder: DRB Contract Cleaning

17/09/2010 Acquisition of David Jones Financial PlanningBidder: Paradigm Norton Financial Planning

17/09/2010 Acquisition of Hooper & Wollen Financial PlanningBidder: Paradigm Norton Financial Planning

10/12/2010 (Pending) £10m rights issue/other issue by Investec Structured Products CalculusVct (finance: cash)

23/09/2010 Acquisition of KercadoBidder: Cassidian

28/09/2010 Merger of Priority Express (Couriers) and Cardiff Cycle Courier Company

29/09/2010 Management buyout at Satori SAS (finance: cash, venture capital)Bidder: ManagementVendor: Cobham

22/09/2010 (Pending) Divestment of Stone Firms A - KPMG (Stone Firms)

23/09/2010 Acquisition of Telematics Hardware Assets of Vincotech (finance: existing/not disclosed)Bidder: Trakm8Vendor: Vincotech GmbH

with a £1m turnover and a strong base in

Gloucestershire, but it operates in a different

space to Lifetime. The acquirer, Lifetime,

has grown substantially, has a turnover of

more than a £20m and a national footprint.

It trains people in the fitness, health and

hospitality sectors.

What does everyone have to say?

David Foster, chief operating officer for

Lifetime, said of the deal: “Our strategic

plan has always been to achieve strong

organic growth supported by the acquisition

of relevant businesses.

“Rapido has been extermely successful

in offering vocation training to the childcare,

social care, education and business sectors.

Its offering is a natural extension to our

porfolio.”

Lifetime’s revenues often come from the

public sector. What are the prospects?

Foster says this is an important move

strategically because the government’s

Skills Funding Agency is likely to be pushing

in the near future to working with fewer but

larger providers, as its budget is squeezed.

Buying Rapido makes Lifetime that bit bigger.

So the first deal of many? It’s actually

the second acquisiton Lifetime has made

recently. The company acquired Rising

Stars in July, a training organisation based

in Norwich. That deal and the Rapido

purchase have been funded from existing

cash resources.


the colour of money · insider november 2010 17 pros: it’s relatively quick – as quick as the...

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