Bail! A management buyout may not be the way to sell your business
You own your business and have been distraught about having to go through a marketing and sales process and then not knowing what will happen to your employees. So what you think is the perfect solution appears within your organization. A key manager or group of managers approached him with the proposal to buy the business. The discussion then turns to how you can avoid having to bring the company to market and how the management buyout will provide certainty for the continued employment of your employees.
Well, nothing could be further from the truth. One of the first things management will say is that they can contribute at least 25% of the purchase price. Let’s use a sale price of $ 50 million, which means they would provide $ 12.5 million. TRANSLATION: “Management believes that a bank will lend them $ 12.5 million against the assets of the company.” So what management is really doing is the same thing any buyer would do, that is, use their assets to obtain senior debt from a bank for a portion of the purchase price. They are not putting their own money into the deal as equity.
Since the managers have little or no funds, they will now be tasked with going to the market to find private equity funds and intermediate lenders to finance the balance of the transaction. TRANSLATION: “You are not avoiding taking the company to market, but in fact, you have put the marketing process in the hands of management rather than controlling the process yourself.” Numerous articles have been written over the years that address the inherent conflict that exists when the person who markets the company (address) is the same person who buys the company (address). Two key problems arise. First, management has no incentive to get groups of investors to place a high value on the company because it will reduce the percentage that management can retain. A value of $ 50 million may require a capital investment of $ 20 million. If the management has $ 4 million to invest and outside investors add a capital of $ 16 million, the management only gets 20% interest. However, if the total price is $ 40M with only a $ 10M capital requirement, the investor’s capital would only need to be $ 6M and management would retain 40% of the Company. Second, a quasi-fundraising and marketing campaign by managers will contaminate the buyer pool in many ways that will be detrimental to a future sale if management is unsuccessful.
Managers will assure you that they will be the ones to do the heavy lifting to close the deal and it won’t be onerous for you. TRANSLATION: “Instead of putting all their attention on running the business, management will now be busy trying to organize their own group of buyers and secure financing. Plus, you and the business will have to do the same work (and usually more). in providing due diligence information to various private equity groups and lenders. ” No investor will provide $ 50,000,000 in funding without putting you through every step.
The management will also encounter some surprises. The management told him how they are going to buy the company and protect the employees. TRANSLATION: “The one who has the rules of the money and if the administration does not contribute a significant part of the capital, the administration will not control the company.” Investors will control the business and operate it for the highest rate of return without regard to retention of all employees.
You, however, could be in for the biggest surprise of all! Even if you sell to management, what’s stopping them from reselling the company in six months, a year, or whatever? So even if management did, by some unusual set of circumstances, actually acquire control, they could resell in a short period of time to a totally outside party and the warranty for their employees and their continuing legacy that they thought they no longer had. it will. exists. Management could even double trust the deal. While gathering financial backing from management at the price of $ 50 million, management may be negotiating a follow-up transaction on the sale at a higher price.
They probably told you that the purchase by management would also prevent the likelihood of letting the world know that you are for sale. On the contrary, since many people will have to be part of management’s buying process, your employees and the rest of the world are much more likely to know that you have put up a “for sale” sign on the business. It is much easier to maintain confidentiality in a well-managed marketing process.
If the issues mentioned above are not enough of a concern, this should get your attention. “You will be negotiating against your management in the buyer / seller process.” Negotiations can get intense, and generally the management side will attempt to satisfy numerous parties, including lenders, private equity groups, and each individual manager’s individual interests. Some hard feelings in the context of a total management buyout may be fine, but “some hard feelings” can turn into blatant animosity if you decide that the final management package is not right and your deal fails. Now when you are ready to go to market, you will do so without one of your most valuable assets, which is a motivated manager or management team. Management will also have expended a great deal of energy trying to close the deal and will have a very limited appetite (and even less enthusiasm) for wanting to go through another sales process again.
Proceed with extreme caution (if you wish to proceed) if your manager or management team wants to try to buy your company. It’s something that sounds good and you want it to be true, but it’s generally not true. However, if the owner intends to seek a purchase from management, the advice of a mergers and acquisitions law firm will be his best ally in maneuvering through all the minefields and giving him the best chance of closing. a transaction on satisfactory terms and conditions.