Entrepreneurs and business owners who have worked hard to build successful enterprises may worry about succession planning as they want to leave the business they have nurtured in safe hands. 

Many are understandably keen for a family member to take on the business they have built up once they’re ready to move on, however, that isn’t always possible. Where that’s the case, the challenge is to identify a successor elsewhere – perhaps from within the current management team, or even from an external pool of potential candidates. In this case, the entrepreneur is looking for the best qualified management team to protect and enhance their legacy.

If the business is being passed on to the next owner in return for a monetary consideration, whether to a family member or not, both sides will have to think carefully about how the transaction is financed and financial planning may be required.

Most commonly, the transaction is likely to be a management buy-out, where some or all of the existing management team (possibly including a family member), buys out the current owner, or a management buy-in, where a new management team comes into the enterprise.

In both cases, asset-based lending can be a practical and capital-efficient vehicle for financing the transaction. Indeed, MBOs, MBIs and other types of acquisition are amongst the most common reasons that businesses seek asset-based finance.

Asset based lending blends invoice finance – where a business borrows money against the value of outstanding invoices yet to be settled by customers – with funds secured against stock, property or plant and machinery. The value of these assets is otherwise locked up, so leveraging this value to fund a strategic initiative such as a change of ownership can make a great deal of sense.

Asset based finance of this type can be used to finance substantial deals. It typically works best for businesses with a turnover of £10m a year at least, and where the funding sought is in excess of £2m. And succession planning is often a key driver of the transaction.