PLANNING TO EXIT VIA AN MBO?
Considerations for an owner considering a management buyout.
When I’m contacted by a landscape business owner who wants to discuss exiting his/her business, I ask whether they’ve got already got some ideas of what they’d like to do. Many owners would like to sell the business to their senior managers. Depending on the circumstances, this can be a good option to explore. Some of the discussion points are:
- Do the senior managers have the money to buy his company? (The answer is usually no.)
- If they don’t have the money, can they borrow at least a portion of the business with outside financing?
- Is the owner willing to finance the sale for the managers? To do so means holding a promissory note for most of the company value. The note will be secured by the assets of the business and the personal guarantee and collateral of the buyers. (It’s a good idea to require an outside cash down payment from each of the managers to be sure they are really committed.)
- Are the buyers willing to put their personal residences at risk to secure the promissory note and to replace the owner as the debtholder for the other debt the company has?
- Are the buyers willing to postpone receiving the controlling interest until the owner is satisfied that the cash flow will continue?
- Is the owner willing to sell with little or no cash paid at closing?
- Is the owner willing to risk the purchase price if the buyers cannot keep the company running profitably?
- How will the management team be structured? Who will be the CEO? (The Decider)
If the owner’s company is larger with the following qualities, it may be possible that the transaction could take the form of a leveraged buyout.
- Management team can and has demonstrated their ability to run and grow the company profitably with little involvement from the owner.
- Company has a stable and predictable cash flow. (Recurring revenue)
- The company is well positioned for growth in their market.
- The company has a detailed business plan prepared by the management team that outlines the plan for growth.
- The company has assets including machinery, equipment, and accounts receivable and inventory to use for debt financing.
- The company should have a fair market value of at least $5 million. For private equity investors, the company should have EBITDA of $1 million.
There are a variety of options in the structure and form to accomplish a transfer to key employees via a “buyout.” The most significant factor is to determine whether the key employees will be willing and able to run the company without relying on the owner.
If you’d like to discuss selling your company, your business’ readiness for sale, how your company can maximize its value, or other related topics, we’d be happy to have a confidential complimentary conversation with you about these or any other exit/sales/buying issues.
You can reach me via email: [email protected] or on my cell phone a: 224-688-8838.
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