Caution! A Management Buyout May Not Be The Way To Sell Your Company

Caution! A Management Buyout May Not Be The Way To Sell Your Company

You keep your business and have been agonizing over having to go through a marketing as well as sale process and then not knowing what will happen to your employees. Subsequently, what you believe to be the perfect solution appears right of one’s organization. A key manager or group of managers has got into contact with you with the proposition of buying the business. The discussion then stores on how you can avoid having to take the company to market and also the management’s purchase will provide certainty for the ongoing employment within your employees.

Well, nothing could be further from the truth. One of the first issues management will say is that they can come up with at least 25% belonging to the purchase price. Let’s use a $50M sale price which means they’d provide $12. 5M. TRANSLATION: “Management believes that a traditional bank will lend them $12. 5M against the assets within the company. ” So what management is really doing is the ditto that any buyer would do which is using your possessions to obtain senior debt from a bank for a portion of the price. They are not putting their own money into the deal as fairness.

Since the managers have little or no funds they will now go upon themselves to go to the market to find private equity funds and also mezzanine lenders to fund the balance of the transaction. TRANSLATION: “You are not avoiding taking the company to market, but have, in fact , that marketing process into the hands of management instead of controlling the process yourself. ” Numerous articles have been written in recent times that address the inherent conflict that exists as soon as the person that is marketing the company (management) is the same man or woman who is buying the company (management). Two key problems happen. First, management has no incentive to get investor groups to get a high value on the company because it will reduce the proportion that management can retain. A $50M value might require an equity investment of $20M. If management possesses $4M to invest and outside investors add equity of $16M, management only gets a 20% interest. If, nonetheless the total price is $40M with only a $10M equity prerequisite, the investor equity would only need to be $6M along with management would retain 40% of the Company. Second, some sort of quasi fund raising and marketing campaign by the managers is going to pollute the buyer pool in numerous ways that will be detrimental to the next sale if management is not successful.

The managers definitely will assure you that they will be the ones doing the heavy working out with to get the deal done and it won’t be at all onerous for yourself. TRANSLATION: “Instead of putting their full attention about running the company, management will now be busy trying to coordinate their own buyer group and trying to put funding in place. Additionally , you and the company will have to do all the same work (and usually more) in providing due diligence information to various private equity finance groups and lenders. ” No investor is going to present $50, 000, 000 in funding without putting anyone through all the paces.

Management will also be in for some complications. Management told you how they are going to purchase the company and secure the employees. TRANSLATION: “He who has the money rules and if direction is not putting up a significant portion of the equity, management will not command the company. ” The investors will control the company and definitely will operate it to obtain the highest rate of return with out regard to retaining all of the employees.

You, however , may be in for the biggest surprise of all! Even if you do sell to current administration, what is to prevent them from reselling the company in few months, one year or whenever? So , even if management, by a number of unusual set of circumstances, actually did acquire control, they are able to resell in a short period of time to a totally unrelated bash and the guarantee for your employees and your continuing legacy that you just thought you had will no longer exist. Management could even double earnest the deal. While putting together management’s financial backing at the $50M price tag management may be negotiating a follow on sale transaction at the higher price.