Getting the price right
May 2005
The YFM Group (formerly Yorkshire Enterprise Group), is the most active provider of venture capital to SMEs in the UK. Providing equity for MBOs and MBIs as well finance for early-stage businesses. 'One of the most important ingredients in a successful MBO is making sure that the original purchase price is right. If a management team overpays for a business then you can almost guarantee that it will not be a happy affair,' says Peter Armitage, a director of YFM Venture Finance 'What happens is that the company is then overburdened by debt and all of the management's efforts are focussed on simply meeting the debt repayments instead of developing the business. It becomes a bit of a treadmill with the management working harder and harder but getting nowhere'.
Peter says he can understand the temptation to meet the vendor's price expectations as the management have a real desire to own the business they are running. However, if they overpay then they will effectively still be working for the vendor as all of the profits of the business are being used to repay the debt rather than to increase the value of the business.
This is why Peter believes it is important to involve institutional investors in the price negotiations and to seek objective financial advice from experienced corporate finance advisors. 'We obviously have enormous experience in this area and our interests as a shareholder in the buy-out company are completely aligned with the management. Very often we will end up negotiating on behalf of the management team and I don't remember receiving too many complaints from management about getting the price down' says Peter.
- The YFM Group has over £250 million under management and operates from offices in Sheffield, Rotherham, Leeds, Wakefield, Manchester, Bristol and London. Contact: Peter Armitage, Tel: 0113 294 5000
YFM Venture Finance and YFM Private Equity are authorised and regulated by the Financial Services Authority and are part of the YFM Group.