The 3-Phases of a
Management Buyout (MBO)
[fname], management buyouts (MBOs) are very special and sensitive
transactions that are becoming more and more popular in exit planning as
more business owners realize that outside buyers may not be available to
purchase their business as part of their exit.
For your key employees, this management buyout will likely seem like both a
once-in-a-lifetime opportunity, as well as a large burden of assuming
ownership. Since your managers are being invited to assume the role of
ownership, it is natural that many questions will arise for all parties
involved. Accordingly, these three (3) phases of a management buyout will
assist you in determining the proper steps to take in moving ahead with this
type of exit plan.
Phase #1: Financing & Deal Structuring
The first phase of a management buyout goes to the financial aspects of the
transaction. At the core of the transaction is a sale of a business from
owner / investor to another. The company needs to provide a return on
investment to its new owners. And the exiting owner needs some level of
comfort that the business will continue to operate effectively once the sale
is completed. There are a few questions related to the financing and deal
structuring that surface immediately.
What is the company worth, and what is the manager (or the management team)
able to render in down-payment?
Will the managers secure any bank financing with their own personal
guarantees and the value of the company’s assets.
What is the owner willing to take in a note in order to bridge this rather
large gap between the value of the company and the employee’s available
How is the owner’s note going to be secured?
On the point of value, if an owner wants too high a price or too many
personal benefits or a salary that continues for too long into the future,
the managers will get resentful as they feel that the fruits of their labors
are not going to them (particularly since they have just increased the risk
in the relationship). Owners need to remember that despite the fact that
these employees worked for you all these years, there needs to be a
financial return for them in order for this transaction to make sense.
Beyond that, the particulars of financing the transaction will need to be
detailed as part of the deal structuring.
Unfortunately, financing and deal structuring is the easiest part of this
transaction. Far more delicate is the communications inside and outside of
Phase #2: Intra-firm Communications
The second part of a management buyout is internal communications –
discussions within the firm about succession of the business.
many owners of privately-held businesses feel pressure to engage in a
conversation about the future of the business with their managers. This
naturally comes from the desires of managers to want to know about their own
futures and their potential for greater income and/or ownership. When these
conversations occur, it is important that clear communication is used so as
not to excite the expectations of the managers.
There is a delicate balance in these communications. On the one hand, in
order for your exit to be a success, the managers need to ‘buy in’ to the
idea of ownership. However, in order for their ‘buy in’ to occur, it is
necessary that you communicate your intentions to them about the transfer of
Beyond the communications between you, the owner, and your managers, there
is also the issue of communication with the other employees at your firm.
Which ones will not make the grade and be offered future ownership? Will
they feel alienated? Slighted? Threatened? All of this needs to be
communicated in a transparent manner so as not to interrupt the already
delicate employer / employee relationships between owners, managers and
How these communications are handled is critical and often can occur over
many years as the responsibilities are detailed, defined, and transferred
from the owner to the manager and the management team. Also, over a number
of years, managers are able to naturally assume leadership positions within
the company. This is much more favorable than simply anointing a successor.
In the long-run it all comes down to people respecting other people. It is
not enough for you to believe that your choice for successor(s) is the right
one – your other employees must also feel the same way. Seek inputs from
other employees in a casual manner over a number of months or years so that
you can confirm whether or not you are making the right choice for
Once the choice is made, keep communication clear and open as to the future
of your company.
Phase #3: Communicating the Change Outside
The third phase is that of communications with the outside world. The
customers, the vendors, the bank, and everybody else who comes in contact
with your business needs to know about the transition. Again, it is best if
this occurs over a period of time to make it appear as smooth and natural a
transition as possible. In essence, this is a public relations campaign for
your firm’s transition.
Nobody likes surprises, particularly when it concerns a valuable business
partnership. Accordingly, you need to realize that all of the customers,
vendors, and other people associated with your business need to be apprised
of this succession plan. Once again, a well designed communications strategy
with the ‘outside world’ is appropriate and optimal if it is performed over
a long period of time.
These three phases together provide for a foundation to begin to design a
management buyout for your business. These are helpful steps in starting a
conversation with your team and for you as the business owner, to begin to
consider what's involved, how long it will take, and exactly what you're
able to get out of the business, net of taxes and net of fees over time in
order to meet your post-exit goals. Therefore, management buyouts can be
very helpful to a business owner in a tough economy who is trying to
construct and design a customized exit plan from their business utilizing
the resources that are available to them, namely, their existing management
As always if you need some advice, you're
welcome to email me of call me here at the office at 281-993-4530.
Charles Wilson, CPA/CFF, CGMA, CBEC
Charles Wilson, LLC
307 S. Friendswood Dr, Ste B-2
Friendswood, TX 77546
Charles Wilson, CPA/CFF,
CGMA, CBEC is a Certified Business Exit Consultant and is affiliated with
Pinnacle Equity Solutions, Inc., an Exit Strategies Training and Solutions
company. Parts of the content in this email are taken from previous
Pinnacle Equity Solutions, Inc's. newsletter library and website in
accordance with Charles Wilson's certification in Pinnacle's Certification
and Membership Program. All Copyrights are the properties of Pinnacle Equity
Solutions, Inc. and Charles Wilson, LLC and their respective owners.