Invoice Discounting Case Study - Importer & Distributor of Carpets

Deal type: MBO - Re-finance Industry Sector: Importer & Distributor of Carpets Turnover: £4.5m

This business had been subject to a management buy-out (MBO) three years before our introduction having seen a once dominant market position eroded by complacent management and the withdrawal of working capital facilities by a struggling parent. The MBO was financed out of working capital (invoice discounting and bank overdraft) rather than equity and hit problems after just 6 weeks when the main funder refused to allow the first trance of deferred consideration to be paid.

With the director's keen not to default on the buy-out terms, they were made to repay the deferred consideration of £1m as well as the £2m working capital facilities over the following 9 months. This was largely financed by trade creditors and a replacement invoice discounting facility capped at £750k. Over the following 2 years, the restrictions imposed by the £750k limit, together with the refusal of the discounter to finance stock, resulted in unfulfilled orders and continuing losses.

To overcome the problem we were able to arrange alternative facilities incorporating a £1.3m factoring facility including stock finance plus a trade finance line to fund pre-sold orders. This gave the company all of the working capital it had previously been starved of and enabled the directors to turn the business round. Within six months the factoring facility was converted to invoice discounting.

Additionally, we introduced:

1. New accountants (the incumbent auditors had done little to help since brokering the MBO finance for a substantial fee).
2. Venture capitalists to consider institutional investment.
3. Restructuring specialists to counsel the directors on insolvency issues.

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