HOME | COMPANY | SOLUTIONS | PUBLICATIONS
Letter from the Editor By Jerry Griffin Making the Numbers Work "Informing and Empowering Your Workforce" An idea whose time has come By Gavin Freytag Getting the Money "Managing Your Loan Officer" Advice from a successful lender By Richard Eckels E-Commerce: The Revolution "Changing Business Models in Mid-Stream" An issue you will face By Eric Anderson Exit Strategy "Finding the Best Buyer for Your Company" Leaving successfully By Bob Shortle Reflections "Are You Ready" Are you ready? By Jerry Griffin	Exit Strategy The author of the following article headed Huntington Capital Corp. before he started his own investment banking firm. From my personal experience, Bob Shortle is an incredibly effective person to have on your side of the table. Jerry Griffin Finding the Best Buyer for Your Company By Robert Shortle Executive Summary: Selling your company to your own management can be an excellent way to achieve liquidity, reward management, and create an ongoing legacy for your company. Stumbling blocks may include an unrealistically high price, an incomplete management team, the wrong advisors, or a poorly structured deal. Finding the money is generally not a problem. The unique success of management buyouts If you are interested in selling your business, your own managers may be your best buyers. Over a twelve-year period, every management buyout in which I have been involved has resulted in a company just as strong and profitable—and usually more so—than before the management bought the company. On the other hand, my personal experience is that fewer than half of the companies I have sold to outside buyers have done as well afterwards as before the sale. The reason for the success of management buyouts is that the only important change in the company is in the financial structure. Management has a broader, more motivated ownership involvement and the products and customers have not changed. With other types of corporate merger or acquisition transactions, the new owners may change the management, may change the products or may merge it into something else. Weighing the options There are specific problems associated with each way of accomplishing your exit strategy. Unless your business has sales of $100 million or more or is in the high-technology business, the likelihood of taking your firm public is small. "Corporate synergy" buyers can be hard to find. Moreover, your business may be worth more to them if they can "annex" your territory, increase their market share, and eliminate your people and overhead. "Financial buyers" tend to dominate the market. Typically, they are not engaged in your particular business and are looking primarily for a rate of return on their investment. They will usually want to include some of your management in the ownership of the company, but won’t offer control of the business. In most cases, a focused management group can compete in price with financial buyers because of the breadth of outside investors and amount of financing that is available for management buyouts. The management's ownership will probably be much greater if management is leading the transaction effort. What’s your company worth? Valuation is always a function of who the buyer is. A management group or a group of financial investors will rarely pay more than seven times the company’s real operating earnings, minus the long-term debt. The financial buyer may run the company better than you, but there are only limited structural cost savings by which a financial buyer can increase the company’s real operating earnings. On the other hand, your company may be worth more to a firm that is in your line of business. For example, if you own a small chain of successful retail lumberyards, Menards [the home center chain store] could theoretically buy your stores, eliminate your general and administrative expenses, and make more from your stores than you did. That’s an example of "synergy." Therefore you may be faced with a tough personal decision: sell to a "synergistic" buyer and probably see your company’s identity disappear, or accept a possibly lower price from a management buyout group and create an ongoing legacy for your company. Financing sources When it comes to management buyouts, there is more money available than there are good transactions. Banks and other senior lenders love to lend to management buyouts. Typically, they base the amount they will lend on prevailing lending rates for certain asset categories. For example, they will generally lend up to 75%-85% of the amount of collectible receivables. At the same time, their maximum loan may be limited to four to five times the adjusted earnings of the company. To make up the rest of the price, there is plenty of non-senior debt or equity available from the many venture capital firms that are doing management buyouts today. The buyer must be sure to incorporate excess borrowing capacity in the line of credit with the bank. The structure of the transaction should also allow for the fact that because the credit worthiness of your company may have been temporarily reduced by the buyout, some vendors may tighten their terms of sale. We always create a financial model of the company to build in the necessary borrowing capacity. Advisory Team Having a good team of advisors is vital for a successful management buyout. You will need: An attorney experienced in merger and acquisition transactions. A CPA to handle the tax aspects of the transaction. An investment banker. The investment banker facilitates the transaction by establishing the value of the company, structuring the transaction, helping generate the financing memorandum for securing the financing, soliciting several funding sources to find the most competitive financing package, and keeping the transaction on track through the final closing. With a solid, proven, and knowledgeable advisory team in place and a sincere interest in getting a deal done, you will have a high probability of accomplishing your exit strategy with a management buyout.
PRIVACY | CONTACT US