You own your business and have been distraught about having to go through a marketing and sales process and then not knowing what will happen to your employees. So what you think is the perfect solution appears within your organization. A key manager or group of managers has approached you with the proposal to buy the business. The discussion then turns to how you can avoid having to bring the company to market and how the management buyout will provide certainty for the continued employment of your employees.

Well, nothing could be further from the truth. One of the first things management will say is that they can contribute at least 25% of the purchase price. Let’s use a sale price of $ 50 million, which means they would provide $ 12.5 million. TRANSLATION: “Management believes that a bank will lend them $ 12.5 million against the assets of the company.” So what management is actually doing is the same thing any buyer would do, that is, use its assets to obtain senior debt from a bank for a portion of the purchase price. They are not putting their own money into the deal as equity.

Since the managers have little to no funds, they will now be tasked with going to the market to find private equity funds and intermediate lenders to finance the balance of the transaction. TRANSLATION: “You are not avoiding bringing the company to market, but in fact, you have put the marketing process in the hands of management rather than controlling the process yourself.” Numerous articles have been written over the years that address the inherent conflict that exists when the person who markets the business (management) is the same person who buys the business (management). Two key problems arise. First, management has no incentive to get groups of investors to place a high value on the company because it will reduce the percentage that management can retain. A value of $ 50 million may require a capital investment of $ 20 million. If management has $ 4 million to invest and outside investors add $ 16 million in equity, management only gets 20% interest. However, if the total price is $ 40 million with a capital requirement of only $ 10 million, the investor’s capital would only need to be $ 6 million and management would retain 40% of the Company. SecondA quasi-fundraising and marketing campaign by managers will pollute the buyer pool in many ways that will be detrimental to a future sale if management is unsuccessful.

Managers will assure you that they will do the heavy lifting to close the deal and that it will not be onerous for you. TRANSLATION: “Instead of putting all their attention on running the business, management will now be busy trying to organize their own group of buyers and trying to raise funds. Also, you and the business will have to do the same work (and usually more. ) by providing due diligence information to various private equity groups and lenders. ” No investor is going to provide $ 50,000,000 in financing without putting every step of the way through it.

The management will also have some surprises. The management told him how they are going to buy the company and protect the employees. TRANSLATION: “Whoever has the money rules and if management does not contribute a significant part of the capital, management will not control the company.” Investors will control the business and operate it for the highest rate of return without regard to retention of all employees.

You, however, could receive the biggest surprise of all! Even if you sell to management, what’s stopping them from reselling the company in six months, a year, or whatever? Therefore, even if management, by an unusual set of circumstances, did indeed acquire control, it could in a short period of time resell to a totally outside party and the warranty for its employees and its continuing legacy that it thought it no longer had. exists. Management could even double security deposit the deal. While gathering financial backing from management at the price of $ 50 million, management may be negotiating a follow-up sale transaction at a higher price.

They probably told you that the purchase by management would also avoid the likelihood of the world knowing that you are for sale. On the contrary, since many people will have to be part of management’s total buy-in process, your employees and the rest of the world are much more likely to know that you have put a “for sale” sign on the business. It is much easier to maintain confidentiality in a well-managed marketing process.

If the issues mentioned above aren’t concerning enough, this should get your attention. “You will be negotiating against your management in the buyer / seller process.” Negotiations can get intense, and generally the management side will try to satisfy numerous parties, including lenders, private equity groups, and each manager’s individual interests. Some hard feelings in the context of a full-blown management buyout may be fine, but “some hard feelings” can turn into blatant animosity if you decide that the final management package isn’t right and your deal falls through. Now when you are ready to go to market, you will do so without one of your most valuable assets, which is a motivated manager or management team. Management will also have expended a great deal of energy trying to close the deal and will have a very limited appetite (and even less enthusiasm) for wanting to go through another sales process again.

Proceed very cautiously (if you want to proceed) if your manager or management team wants to try and buy your company. It’s something that sounds good and you want it to be true, but it’s generally not true. However, if the owner intends to seek a purchase from management, the advice of a mergers and acquisitions law firm will be his best ally in maneuvering through all the minefields and giving him the best chance of closing. a transaction on satisfactory terms and conditions.