Cashflow gap while exploring a sale — what are the options?

[raagiara]

Hi all,

Posting this hypothetically as I'd like to understand what options exist before committing to anything.

Imagine a UK-based service business turning over £2m+ per year. EBITDA has been around 9% for the last 12 months, and 11% and 15% in the two years prior — so margins have compressed a bit but the business is profitable and trading.

The owner is in the early stages of exploring a partial or majority sale — nothing imminent, but the process is underway. The challenge is that there's a cashflow gap right now of roughly £100k that needs bridging while the longer-term deal gets sorted.

One option being considered is whether a serious prospective buyer might be willing to inject that £100k upfront — essentially as an early show of commitment — before the full sale process formally kicks off. Whether that would be structured as a loan, a deposit against the eventual deal, or a small initial equity stake, we're not sure. Has anyone seen this kind of arrangement done in practice? And if so, how was it typically structured to protect both sides?

Beyond that, are there other realistic options for accessing £100k relatively quickly in this situation — secured against the business's performance or the anticipated sale proceeds? A specialist lender, a private investor, a broker?

Keen to hear from anyone who has been through something similar or works in this space. Thanks in advance.

 

[Paul Kelly ICHYB]

The first thing I would want to understand is how you have that shortfall on a business that should be making £100k net a year.

As a buyer, needing that £100k would indicate you are in trouble or have some inherent issues, especially with the declining profit. I would see it as an opportunity to get the price down significantly.

 

[Mark T Jones]

If can persuade the buyer to stump up, that is the best option in many ways.

If you need to borrow the money commercially, then key questions would be:

What has caused the problem/has it been resolved?

What repayment profile do you need?

What will happen if the sale doesn't go ahead?

What security is available to a lender?

 

[pentel]

One option being considered is whether a serious prospective buyer might be willing to inject that £100k upfront

Highly unlikely.

In my experience it is likely to take 6-9 months from agreeing initial terms to completing the sale.

From the figures given there should be sufficient cash in the business for cash flow not to be an issue unless the business has been treated as a cash cow and has had all of the profits extracted. If this is the case due diligence is likely to uncover other issues which could affect the sale, even to the point of not proceeding.

 

[Mark T Jones]

Highly unlikely.

In my experience it is likely to take 6-9 months from agreeing initial terms to completing the sale.

From the figures given there should be sufficient cash in the business for cash flow not to be an issue unless the business has been treated as a cash cow and has had all of the profits extracted. If this is the case due diligence is likely to uncover other issues which could affect the sale, even to the point of not proceeding.

Except that cashflow & profit can be very, very different.

Plus EBITDA isn't used in the lending sector.

The cause of the discrepancy is relevant because there may be specific finance tools to address it.

 

[pentel]

Except that cashflow & profit can be very, very different.

Plus EBITDA isn't used in the lending sector.

Very true. EBITDA is a very misleading figure, the 9-15% EBITDA quoted by the OP could result in a loss, especially if there are large borrowings and substantial capital investments.