Management Buyout 101
On today’s blog, our start-up expert, Michelle Lopez, shares 10 things you need to know about management buyout from the buyer’s perspective.
Identify your team. Before any conversation begins, the management team needs to identify their team. While much has been written about the importance of advisors, this is even more important in a management buyout.
Identify bias. It is important to recognize that the company’s existing advisor team most likely represents the company – not the buyers (and technically, they also don’t represent the existing shareholders). This means that the lawyer or accountant you have worked with for years – and who might be genuinely excited to see you purchase the business – is not necessarily in a position to advise you as to the structure that will be the most advantageous to you and your fellow purchasers.
Due diligence is critical. It is difficult to employ a jaundiced look at a company that you may have dedicated a large part of your professional career. Using your outside advisors, establish a true “real market value” and continue to ask yourself if you would buy the company for that price if it wasn’t one that you worked for. Challenge yourself to consider whether your efforts wouldn’t be better spent creating a competing venture and/or acquiring a competitor (depending on your restrictions). Ensure that your team of advisors has someone with the specific expertise to provide you with a “quality of earning” analysis which will help you understand the quality and dependability of the cash flow from the business.
Recognize that the sellers will likely have other potential buyers. These could include local and national competitors, aligned industries, strategic acquisitions and venture capital backed acquisitions. A strategic acquisition is generally for a higher dollar amount because it relies on “synergies” (usually cost reduction or revenue growth) to support a higher valuation. But no matter who the competing offer might be from, it is important for the seller to understand that oftentimes outside buyers will present a rough offer that is considerably higher on its face. While these offers can sometimes come to fruition, they are just as often significantly reduced during the due diligence process. This presents a strategic benefit for you because, ostensibly, you already know the results of the due diligence process.
Remember, this is a negotiation. Accept that, during the process, no matter how friendly and open the transaction is with the existing owners, this is still a negotiation. As such, it is important that what might seem like an innocent “hallway discussion” with the current owners is still exactly that – part of the negotiation. It’s prudent, then, to limit discussions about the proposed deal to a more formal setting and save the hallway chatter to weekend plans and routine work. Establish clear lines of communication – who is authorized to speak on behalf of the buyers and who is authorized to speak on behalf of the sellers. Try as hard as possible to limit the conversations between each side to those authorized parties.
Acknowledge the seller’s legacy. Recognize that the transition from owner to seller can be emotional – especially for first generation owners. If the owner(s) are retiring, they are grappling with all the emotions associated with retirement along with selling their business. Consider separate conversations about the role of the owners post-transition. Are there roles that you can create for them to protect and grow their personal legacy?
Consider the roles of current shareholders. Ensure that you have considered the job of each selling shareholder and determined whether or not, and to what extent, those roles need to be replaced post transition. Ask each selling shareholder to create a job description that fully covers all of the tasks for which they are currently responsible. For any role that includes relationship management and/or sales, ensure that a process exists to transition these relationships once the sale has been announced.
Manage the flow of information – especially once the formal negotiations begin. Challenge yourself to not have conversations about the proposed transaction at the office and do everything you can to keep the fact that you might be in negotiations highly confidential. Recognize that employees, especially long term ones, have an uncanny 6th sense as to changes in the tone of the office and will often be the first ones to say “Something’s up”.
Focus on current operations. Make sure that both you as buyer and the existing owners as sellers are all focused on the current operations. Not that there ever is a good time, but this is the worst possible time you want to be distracted from the day to day operations of the business.
Consider a formal communication plan after the transition has occurred which covers who to communicate with, what, if anything, should be communicated and how that communication should occur. You will likely have a number of stakeholders, each of whose messages will be different. These include key employees, rank and file employees, key customers, referral sources, professional relations and the community at large.
Michelle Lopez
Start-ups & Small Business