Sounds Nice, But Will it Work?
Is selling my business to the senior leadership team
(an “MBO” a viable option for my exit?)
Did you know that only about 20 percent of businesses for sale in the U. S. complete the transaction? The most common reason for this is an inappropriate or unreasonable price set by the Seller. There are many other reasons businesses don’t sell that may be out of the Owner’s control (the economy, for example.). The bottom line is that many small businesses owners’ best option for selling their business is a management buyout (MBO). What should an owner consider in evaluating this as an exit option?
Do you, like many other landscape business owners have an “unspoken” (and unwritten) agreement with one or more of your senior managers about the future of the business? Have you given someone an option to buy the business (sometimes the first option) when you are ready to take that step? If those understandings and agreements are not in writing or haven’t been clarified, you may want to think about putting that on your list of things to do. Shining a light on what might be a muddled area can be motivating for you and your leadership team.
In the best cases, the senior managers are already participating in a long-term incentive plan (usually phantom stock or a similar plan) that ties their performance and the company’s long-term success together. Great! That’s an inspired owner who is putting his words into action. By creating a written incentive plan for the senior team to stay and build the company with him, the team can focus on their goals and are less likely to leave their current positions. Managers will be less concerned that they may commit years of their best efforts to an organization that could be sold and leave them without a job with no notice. They will usually be protected in the event the owner decides to sell the company to a 3rd party. The company will benefit in knowing the managers will forfeit payment if they leave before certain dates.
What are some of the top issues an owner should think about for an MBO?
- Do one or more of these individuals have the qualities of a successful entrepreneur? I’ve seen “dream teams” of senior managers who are key to the company’s success in their current areas of work now. What makes these people successful as “right hand person/No. 2/GM” are the same things that may keep them from being as the CEO. Someone in the business must have “fire in the belly”. Unfortunately, those individuals can be hard to manage. Most owners don’t want the constant pressure, so they may not last in a long-term role. As an owner, you have only to consider how well you would do in a company with someone else making strategic decisions that you have to support.
- I often hear “the senior team will work together” so we won’t need a CEO. That might work for a few weeks or months, but management by committee is not very efficient. Remember “group think” and the time even bad decisions can take to decide upon. If you want to kill a business, run it by committee. We value teamwork, but at some point, there must be a Decider/Inspirer/Visionary that has the backing of his/her peers. If you have someone on your team like that, great. Now will the other members of the team work well with that person.
- Does the CEO and the management team have the right competencies, attitudes, experience, skills, and interests to run the company? Can they develop what they don’t have in time?
- Does the successor team have the financial wherewithal to buy the company? Can they/will they assume the debt that the company requires to thrive after you’ve stepped out of the picture? Which of them will be willing to put their personal assets up for security for business loans? Are they risk averse or entrepreneurial in planning to grow the company and make investments that tie into their personal finances?
- How will the team deal with its structure versus ownership? Will they do it in equal shares? One majority owner?
- Most MBOs will need financing and a lot of that will come from the business itself over time. This can work for both the owner who wants to receive his purchase price over several years as well as for the buyers who will pay for the company from the profits they generate. But what happens if the business begins to experience difficulties? Will you be ready and able to step back in and right the ship? If you are expecting payments for your retirement, you will want to be sure the company can provide those payments. You will continue to have risk related to the business until the promissory note is paid in full.
All that being said, a Management Buyout can be successful with the right management team, the right business and an owner that understands the issues and works through this option carefully. I’ve seen many work very well in the long term. Some of them are a combination of MBO/Family Legacy exit plans that also work well.
The most important thing you can do as an owner is understand what your options are, and which are the best fit for you and your business. It’s never too early to begin thinking and planning these moves. If you’d like to begin work on your options, your succession and/or exit plan, we’d like to help. Another option you might consider is selling your business and putting a phantom stock plan in place for those senior leaders now. Ready to buy a business? If any of these or other topics around buying, selling, or adding value to your business before selling are on the top of your mind, please feel free to reach out for a confidential conversation.
For these and any other exit/sales/buying issues you can reach me via email: [email protected] or on my cell phone at: 224-688-8838.
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*Source, US Chamber of Commerce, and others, varies on the size of the business (larger ($30 million in revenue) could improve that percentage up to 30-35% of businesses. Still dismal.