Management buyouts have become a common exit strategy when selling a business, and there are two sides to the transaction. On one side, there is the owner looking to sell part or all of its company. On the other side, there is the buyer – an employee of the company being sold.
While an MBO, is in fact, an acquisition, it does not involve an outside group. Rather than being acquired by another company or outside investor, in an MBO, the business is acquired by its own management team. During a management buyout, some owners intend to sell 100% of the company, while others wish to retain a residual interest.
So why should you consider management buyouts? Well, they are actually a positive indicator for most companies, maintaining company culture and growth opportunity and shortening the lengthy due diligence process of selling to an outside investor. Ultimately an MBO shows that employees value the work of the company and believe in its future.
You may want to consider a management buyout if the following factors are present within your company.
Strong Management
Since a company’s management team is often the most knowledgeable about the business, a transfer to those individuals usually proceeds without major drawbacks. These new, yet familiar owners understand the culture and values of the company, which will also help in reassuring other employees who may be hesitant about the buyout.
A Culture of Confidentiality
If keeping internal processes and responsibilities confidential is important for the success of your company, the most trusted individuals to hand it off to would be those who already know the insider information. Rather than risking the core foundation of the company by selling to an outside investor, you can find comfort in knowing that the new owners respect the confidentiality of the business as much as you do.
Foreseeable Growth
If the company is positioned for growth and operates within a stable industry, it is better for those who understand the business to continue driving it forward. Outside investors may attempt to change the path of the company and take risks that alienate current employees and customers.
Financial Understanding
An MBO can have substantial financial payoffs if, as the business owner, you have realistic expectations about the value of your company and are willing to work with both the management team and the financial investors. The business owner and management team should consider three things with a private equity partner:
- Their financial resources
- How they align with your company’s interests
- The value-added services they can provide
Management buyouts are a viable exit strategy alternative for business owners. If you’re ready to sell, consider your options and contact Symmetrical to learn if a management buyout is right for you and your team.
Starting a new business is an uphill battle – there are many things to consider: who your target audience is, whether or not you want to enter into a partnership with another person or business owner, how many years you plan on being in the industry, etc. With so many decisions to make, it’s understandable that some things fall through the cracks. However, you don’t want to overlook the negative effect credit mistakes can have on your company. Not only do these mistakes have the potential to be detrimental to your company’s success, but they can also become a personal financial burden.
Symmetrical Investments is here to help you! The first step is to understand common credit mistakes so that you can prevent them before they affect your business. Keep an eye out for these common financial faults, in order to keep your company stable both now and in the future.
Failing to keep financial data
Keeping track of all of your financial transactions is crucial to staying on top of your expenses. While you may be tempted to unclutter your desk by tossing away receipts and other paperwork, make sure you are retaining this information for future record. Using online record-keeping software that files your receipts digitally could save you from losing key information, all while keeping your desk organized.
Intertwining personal and business finances
Especially if you’re a small to mid-size business, it is easy to fall victim to combining your personal and business expenses, but this decision can become sticky when tax season rolls around. Think of your business as a viable entity – create a separate checking account, use a business credit card, and consider establishing a limited liability company (LLC) or an S Corp for your business.
Late payments
Companies have to pay out certain things on a regular basis – inventory, employees, software licenses, and other expenditures. Businesses who get in the tendency of paying these late have a higher chance of failure. Keeping cash gaps as short as possible is crucial to avoid having to take out loans and debt that eat into profit.
Focusing only on short-term
Most businesses want to stay in the industry for years down the line, but they fail to plan properly. While it is important to focus on the initial aspects of starting your company, you must also think about future growth and the obstacles that you may face. It is important that you regulate your spending so that you have working capital for future investments.
Borrowing from the wrong kind of lenders
Exploring your borrowing options is also important to financial stability. Make sure you understand the financial lingo, such as the definition of a loan versus a line of credit. With increased understanding, you can make sure that you choose the loan solution that’s best for your company.
Credit mistakes are common in every company, but they’re not all irreversible, so take the appropriate steps to avoid them. The initial commitment to good credit practices may seem daunting, but our team of experts is here to help you with the process. Contact us to learn more.
First of all, what is a Leveraged Buyout (LBO)?
A leveraged buyout (LBO) is when a company uses leverage, mostly debt, to acquire another company or one of its parts. Private equity groups generally invest a portion of their equity and then use leverage, like debt, to fund the remainder of the purchase. While this process may seem daunting, when broken down into steps this becomes a more manageable and understandable process.
The process of a completing an LBO can be both complicated and full of risks. When considering an LBO, a company must do research to understand the cost, risk, and strategy for the company. The following steps are crucial in the LBO process:
1. Determine the Cost
It is important to determine what the maximum purchase price is based on leverage levels and projected returns. You need to build a model. If you have never build a model before, start with a software such as Business ValueXpress. BVX integrates Price, Terms and Deal Structure, and uses optimization techniques to satisfy the needs of all parties to an M&A transaction.
2. Determine the Buyout Scenario
Although buyouts can occur in a variety of scenarios, it is important to consider what type of plan your LBO is. Four of the more popular plans are repacking, splitting up, portfolio plan, and the savior:
– Repackaging a company is the process of buying up the remainder of a corporations stock in order to make it private. Once the company is repackaged into a more successful model, it can be returned to the market at an increased multiple. See Multiple Arbitrage.
– Split Up is a strategy where it is determined that a company’s parts are more value than its sum. In this instance a company will be dismantled and each portion will be sold for a higher profit.
– Portfolio Plan is when the acquired company and the current company are more valuable when combined. This is essentially merging both companies’ best aspects to make one stronger corporation.
– The Savior Plan, usually regarded as risky and too late, occurs when a company is in distress and a white knight comes in to turn the company around. If done properly, this can be very lucrative. If done improperly, this can lead to disaster.
These are just four LBO plans of many. Most importantly, knowing which direction you will take the company post-transaction is crucial in creating a plan and setting goals for a successful LBO.
3. Set a Target Exit time
On average, the holding period for a company that has gone through an LBO with an institutional buyer is three to seven years. It’s critical to understand your objectives and determine where you’re trying to go. Your exit timing will need to include the 6-12 months that it will likely take to divest your investment.
4. Consider Exit Strategies
Based on the chosen buyout scenario and exit time, it is important to consider what the exit strategy will be. Two of the most popular exit strategies include, sale to a strategic buyer or another LBO.
Sale to a strategic buyer is very common and is viewed as quick and simple. This buyout occurs because the strategic buyer will determine that the company offers synergy to its existing business.
– Another leveraged buyout is a strategy in which a different private equity group, family office, or high net-worth individual buys the company in the same manner the original did. This strategy can be difficult as the new sponsor will be more challenging to bargain with.
Understanding the complexities of an LBO is important. There are many risks in taking on such a project; however, if done effectively in a strong market it can yield significant rewards. Following these steps and analyzing the business acquisition can make the LBO process easier to navigate and understand.
Recapitalizations are the way of the future. It is no longer acceptable for an owner to sell their business one day then turn around and go to the shore the next. Private equity investors and strategists alike can bring down their risk profile and increase valuation by keeping owners engaged for some period of time post-closing. If an owner is going to stay around post-closing, why not keep some equity?
So, what is a recapitalization? Recapitalizations are typically used to fund future growth initiatives, make a company’s structure more stable and/or provide liquidity to business owners. When an owner sells over fifty percent of the business, but still maintains ownership in the company, this is a majority recapitalization.
Here are three reasons why majority recapitalizations make sense for business owners:
1. They keep a piece of the pie
A business owner may not be ready to fully retire. However, they may be willing to relinquish some of their day-to-day management duties where they may not add as much value as in other areas where they really excel. A majority recapitalization allows owners to remain involved and own a portion of the business while lessening their overall responsibilities.
It’s worth mentioning that by keeping original business owners involved, the company culture is less likely to change. Employees who love where they work are more likely to stay engaged and continue contributing to a company’s bottom line.
2. They gain flexibility and liquidity
A major reason owners enter into majority recapitalizations is to gain liquidity. The current owner(s) may see a growth opportunity for the company, which requires a financial partner that can provide cash. In exchange for the capital, the owners are willing to sell a portion of the company.
Other uses for the capital include: starting an entirely new business, or investing in stocks, business, or other assets to diversify the sellers’ finances.
3. They keep options open for the future
By maintaining an ownership stake in the company, original owners can still reap the benefits of the company they are selling a stake in. It’s important to consult with a team of professionals before embarking on a recapitalization. This team typically includes an M&A advisor, attorney, accountant and others.
A majority recapitalization is a great way for business owners to get the capital they need, without relinquishing total control of your business. Investors can breathe new life into the business and bring new ideas that can contribute to future growth. It’s important to choose your investor carefully and pick someone who shares your vision for growth and company culture as you’ll be growing the business together.