Management Buyouts – Overview
If a business owner thinks a sale to management is a good idea please have them read this email first. The following represents the tip of the iceberg in what a management led buyout may include:
- A direct conflict of interest exists since management will want to drive down the price or value of the business so that they have to raise less capital. That allows management to get a bigger percentage ownership interest based on the limited equity they will invest as compared to the third party capital required.
- Management will not control the company after the sale since lenders and private equity groups will generally put up most of the money and “he who has the money will rule” in these cases.
- Management can “flip” the company right after closing. That warm fuzzy feeling about how management will continue the owner’s legacy and will retain all the employees goes right out the window when management turns right around and sells the company for a few million dollars more than they paid for it.
- Owners will not avoid the sale process since a management led buyout will require the same or greater diligence and other work in order to obtain financing for the management group.
- Confidentiality will be difficult to maintain because many parties will be involved in the buyout process.
Company operations will suffer while management directs a large part of their time and attention to; (i) negotiating internal agreements with their management team, and (ii) marketing the company to financial sponsors. - Owners and managers become adversaries. If the buyout fails, the owner losses one of its most valuable assets; an enthusiastic management team to get the business through a full marketing process.
Click on this link, “management buyouts,” to view a more detailed discussion of what to consider before going down the path of a management led buyout. If the owner is intent on pursuing a management buyout, the M&A Law Firm will be the owner’s best ally in maneuvering through all of the minefields and giving the owner the best possibility of closing a transaction on satisfactory terms and conditions.
