Business beaver (From Wiltshire Business Online)

Business beaver

2:25pm Tuesday 2nd December 2008

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With the Bank of England's policy committee slashing base rates and unemployment rising there can be few businesses in the SME sector that are not feeling the heat as economic conditions tighten.

Those business owners who were perhaps contemplating exiting their business within five years, may find their preferred timescales shortening. For some the lure of retirement will be just too tempting when compared to the effort that will be required in the short term to see their company through.

Research in the area of the owner managed businesses worth under £10m carried out during 2007 shows that in recent years the most common exit routes were by trade sale or management buy outs with management buy ins and other variants trailing behind.

What may have escaped many business owners looking at their five year window is the impact that the credit crunch is having on this balance between trade sale and MBO exits. Trade sales will become less prevalent over the next decade for two principal reasons.

More potential trade purchasers will be focusing on the well being of their core business and will be reluctant to take on the exposure of the additional loan funding often required to fund a purchase.

Perhaps less obviously, the credit crunch is suppressing sale values. Take a grossly simplified example of a trade purchaser wanting a three times return on investment over a three year period. Two years ago bank lending would have been available to match £1 of bank lending for every £1 of equity investment. Now the bank will only match £1 for every £2 of equity.

The message to business owners looking to exit over the next few years is to be aware of these factors. If the answer is no and it's because there is no suitable candidate to lead an MBO team you may have to be prepared, to take the short term hit in costs to get that person on board and start developing them.

If you don't when you reach the stage where you do want to sell you could find the right purchaser just may not be there.

• Contact Rob Harman at Morris Owen on 01793 603900

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