We recently had a case where a client felt it was important to offer key employees the opportunity to buy a minority share of the business. There are many issues to be considered but a key item from a lending perspective becomes the need to deal with what the bank holds as security.
Typically the bank will seek guarantees from all directors and shareholders involved with a company. This created two issues in our case. The incoming purchaser did not want to guarantee 100% of the company debts as they were purchasing a minority shareholding. Secondly, the current owner’s personal real estate was held as security for the companies borrowings. This position of inequity needed to be dealt with to get both parties comfortable and secondly the bank needed to buy in.
The approach required a rethink of the bank facilities offered to provide working capital. We decided to replace the company overdrafts with debtor finance facilities which enabled us to release the majority shareholders personal real estate as security. The bank’s security would now consist of a charge over the companies debtors. The directors were still required to provide personal guarantees however we were able to negotiate with the bank to accept limited guarantees from each director equal to the percentage of shares they held.
The last step in the process involved adding an extra layer of comfort to the majority shareholder. This involved refinancing all property related debts to different funders. The property portfolio consisted of 8 properties held across 3 different entities. Previously every entity and property was captured as security for the companies working capital loans (cross securitised). The end result being the majority shareholders personal assets are no longer tied to the operating companies as security.
If you have any queries regarding loans, banks or structuring debt, please don’t hesitate to contact our Finance Broking Team.