Working Women
As a substantial amount of loan finance and overdraft facility will be used to finance the purchase, it is essential that there are sufficient tangible assets in the business to provide adequate security for the lenders. Service companies that are low on asset backing and heavily dependent on retaining key fee-earners may well be unsuitable. Not only is there the lack of security for the lender but there is an added risk that key people who are not part of the management team making the investment may leave. Increasingly, whole teams of people leave companies either as a result of head-hunting or to start their own business. In either of these circumstances a significant proportion of their clients may follow them.
The business
A suitable company must have a long-term future. The sale of the business or obtaining a stock-market quotation could take up to 5 years. Then the purchasers or new investors will want to see continuing prospects, so the cash flow generated has to be sufficient to pay interest charges, to provide for investment in replacement equipment and new technology to remain competitive, and to improve existing products and develop new ones where necessary.
The business may be making only a modest profit, producing a loss or be in receivership at present. This does not necessarily mean the company is unsuitable. A clearly thought-out plan will be needed, however, to show how sufficient profit can be achieved to help generate the necessary cash flow.
Factors which may make this feasible include:
• eliminating central service charges and providing the necessary facilities within the business at a much lower cost
• identifying specific and achievable cost-reduction opportunities
• defining opportunities to generate additional turnover from the existing facilities
Significant amounts of business with other group companies may be a cause of vulnerability. The management team should not expect favoured treatment as an independent com
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