Business Transition Strategies: Existing Manager Buyout

Man and woman high-fiving over a business deal

For those who want to sell their business, but are concerned about the impact to employees and operations in the event of a third-party sale, a manager buyout may be an option. Keep checking in throughout March for more articles about exiting your business!

What is a Manager Buyout?

When the time comes for a business owner to exit their role, the managerial team may be interested in buying the company before it makes its way onto the public market.They assume all assets, property, and operations, unless other arrangements have been made for the existing owner/founder to maintain some control of the business. 

In some cases, such as when Michael Bell paid $25 billion for his own company in 2013, founders pay to take a company private to maintain more control and eliminate stakeholder influence over the trajectory of a business. 

There are several reasons why manager buyouts are an appealing exit strategy for both large companies who want to sell individual divisions or privately-owned SMBs with owners who are ready to move to the next stage of their lives. Let’s look at three of them:

It Allows for a Smooth Transition

Business transitions come with anxiety, whether it’s something as simple as bringing on a new employee or something as complicated as an owner exiting. Those involved wonder how the dynamic and operations might change with a new variable in the mix. 

With an MBO, however, the new owners of the business have already been entrenched in its culture and operations. It often provides greater security for the integrity of the business and gives peace of mind to employees who may fear the impact a transition could have on their jobs. 

Perhaps most importantly for the ongoing financial health of the business, it reassures clients and customers that the quality they’ve come to expect is going to continue. 

During typical business sales, it’s not at all uncommon for clients to double-check their contracts for exit clauses, in the event that the sale causes fundamental changes to the company’s ability to provide expected goods or services. 

There are More Options for Securing Funding 

Because owners know and trust the people purchasing their business, many are more likely to accept negotiated-upon payment plans, versus expecting all cash at the point of sale. That opens up a few more financing options. 

  1. Bank financing usually requires the new managers-gone-owners to put up quite a bit of capital before banks are willing to lend the remaining amount required to complete the purchase.
  2. Establishing ESOPs, or Employee Stock Ownership Plans, allows employees to purchase shares of the business. This could provide an additional stream of financing, as well as incentivize employees to stay on despite the change in leadership. 
  3. Installment stock purchase gives the transitioning owner continued part-ownership until the total amount of the sale is paid off.
  4. LMBOs, or Leveraged Manager Buyouts, allow the management team to use company assets as collateral for financing. This increases your chances of securing bank financing, as it puts some “skin in the game,” thus reducing risk. 

You Skip the Time Spent with Your Business on the Market

As we shared last week, businesses spend an average of 6-11 months on the market before they are purchased by a third party, with that timeline increasing depending on the current economic climate. 

Because MBOs eliminate the need to find an interested third-party buyer, the sale process can progress much faster. The flexibility in payment options also makes it easier for managers to collect funding on shorter notice, further reducing the time between your decision to transition out of your business and the final sale. 

For business owners who are ready to exit their business sooner, rather than later, MBOs are a good compromise between complete liquidation to get cash in your pockets as soon as possible and third-party sales, which would halt their transition indefinitely. 

If you’re considering a Manager Buyout, or any other exit strategy, it’s wise to discuss your options with the experts at Catalyst Group ECR.

Business owners who work through their exit strategy with Lori will find themselves more effective in their professional and personal lives, with the ability to take charge and handle their transition with finesse.

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *