Leveraged Buy In Management Buy Out

​​​​​​​​The Challenge

A marketing and print management company with £8.9 million in sales was in a state of financial collapse. Despite having received £1 million in investment and £7 million in loans and loan notes, the business was failing. It was facing a winding-up petition from HMRC for unpaid VAT and PAYE, totalling over £1.2 million. The company had significant unsecured debt of over £500,000, and despite a large invoice discounting facility, it had severe cash flow issues. The situation was complicated by a complex corporate structure, with a holding company that owed the trading company a substantial sum, and a desire from the largest loan note holder (the director) to invest and take control of the business while saving the investments of other venture capital backers.

The Solution

RSM KSA was brought in to devise a complex rescue plan. A Company Voluntary Arrangement (CVA) was chosen over a pre-pack administration due to the bank’s and investors’ preferences. The plan included:

• Radical Restructuring: Employee redundancies were planned, but the company’s senior and mid-management team had to be reduced immediately, and so this occurred, saving over £600,000 in annual costs.
• Financial Reorganisation: The trading business was “hived down” into a new subsidiary to avoid public sector tendering problems associated with insolvency. RMT KSA also drove a simplification of the balance sheet by writing off inter-company loans.
• Capital Infusion and Control Shift: The largest loan note holder and new managing director agreed to invest £250,000 in new loans in exchange for a 75.1% equity stake in the new subsidiary. The original investors and loan note holders retained a 25% stake, providing them with some potential future upside.
• Creditor Negotiations: RMT KSA carefully guided the bank through detailed financial forecasts, securing a 6-month capital payment holiday on a term loan. A CVA proposal was put together, and major creditors, including HMRC and the venture capitalists were worked with, to get their support.

The Results

The CVA was successfully negotiated and approved by creditors, including a crucial vote in Favour from HMRC, which was owed £1.3 million. The CVA proposed a dividend of 34p in the pound to unsecured creditors over five years, with only one small creditor voting against the proposal. The rescue plan saved 60 jobs and allowed the company to continue trading. The restructuring enabled the company to get its costs under control and gave the new managing director the equity and control he needed to turn the business around.