Accountancy

MBO For Security Business With £6m Revenue

Can You Really Buy a Business Without Using Your Own Funds? Yes, Here’s How P10 Helped To Structure It.

The Background

It’s one of the biggest myths in the world of business acquisitions: the notion that you can’t buy a company without dipping into your own pockets. I’ll be straight with you—these deals are tough to pull off, but they’re far from impossible. You’ll still need some cash on hand to cover your own professional fees, and believe me, your legal and due diligence team will be worth every penny. They’ll uncover the risks that could derail the deal, even if you think you know the business inside out.

Recently, we were approached by a client with a rather ambitious goal: acquiring 100% of a family-owned security company without using much of his own money. The business had been providing security staff to various venues and was turning over a solid £6 million a year. Our client, the current Operations Manager of the company, had already agreed on a valuation of £1 million in principle. However, before he signed on the dotted line, he wanted to ensure that the company was financially sound and worth every penny of that £1 million.

A sunset view of Yosemite National Park in the United States. The sun is going down, and there's a moody dark sky. Most of the mountain range is in shadow, and you can see mist coming off the forest at the bottom of the image.

The Key Information

Turnover: £6 million per annum
Ownership: Entirely family-owned
Agreed Valuation: £1 million
Our Client: Current Operations Manager

Though our client was deeply familiar with the company’s operations, he wanted to verify that the business was financially robust and that the £1 million valuation was justified. We were brought in to handle the due diligence from an accounting and tax perspective, establish a formal valuation, and structure a deal that would allow him to take over the company with minimal upfront cash.

Our Involvement

We focused on two key areas for this deal.

First, we needed to conduct thorough due diligence. This meant digging into the company’s financial records for the past five years, verifying assets and liabilities, and ensuring there were no hidden financial pitfalls that could haunt our client later. We also had to check the company’s existing financing arrangements to make sure they would remain intact under new ownership, without disrupting cash flow.

Once due diligence was complete, our next challenge was to structure the acquisition in a way that met both the seller's financial expectations and our client's need for security over the business's future performance. The catch? Our client didn’t have the cash needed to pay for the business upfront.

The Solution – Part 1: The Valuation and Deferred Consideration

After crunching the numbers, we valued the business at around £1.2 million, slightly higher than the agreed £1 million, thanks to some adjustments we identified for future cost savings. This confirmed that the £1 million price tag was indeed fair.

For the purchase, we implemented a deferred consideration model. This allowed our client to pay for the business over several years, with the payment schedule looking like this:

On Completion: £200,000
End of Year 1: £200,000
End of Year 2: £200,000
End of Year 3: £200,000
End of Year 4: £200,000

Total Sales Consideration: £1,000,000

The catch? Each payment was contingent on the business hitting specific profit targets each year. If profits fell short, we’d reassess the business’s value and adjust the remaining payments accordingly. This approach gave our client peace of mind, ensuring he wasn’t overpaying for a business that couldn’t sustain its historical profitability.

The Solution – Part 2: Financing the Initial Payment

With the structure in place, we still had to figure out how our client would come up with that first £200,000 payment. Personal finance wasn’t an option.

Our solution was to create a holding company for the acquisition. This not only opened up new financing possibilities but also offered flexibility for a future sale. The trading company had an underutilized invoice finance facility, which we tapped into by drawing down funds for the day 1 advance payment of £200,000. These were then transferred as an inter-company loan to the new holding company, which in turn used them to make the completion payment to the sellers.

This approach enabled our client to acquire the business without using personal funds, all while ensuring the deal was secure and tax-efficient.

Conclusion

In the end, our client successfully acquired the business through a Management Buyout (MBO) structure, using a combination of vendor financing and strategic use of the debtor book. The entire process, guided by our M&A team at P10, was completed within eight weeks. We also future-proofed the tax implications by setting up a group structure, ensuring our client is well-positioned for any eventual sale down the line.

So, can you buy a business without using your own funds? With the right strategy, absolutely.