Could you do a management buy out (MBO) at your company?

We’ve been asked a lot lately about whether a management buy out (MBO) might be possible for many business owners. The real question all owners should be asking is whether your company and you can afford the time and risk it takes to properly execute an MBO plan

Many owners wonder if selling their company to their senior managers might be possible as a way to reward employees and build a succession path for themselves. Before you start planning your exit day, you need to understand what might be involved. This information is useful to you whether you are the manager thinking of buying out the owner or an owner wondering if your employees could be your key to extracting your retirement wealth.

Typically, your business needs to be generating enough cash flow to pay your employee(s) a dividend in return for their performance in growing the company. The employee then uses that dividend to pay you for a percentage of your shares. Depending on the value agreed to, the growth of the company, its own need for capital, your payout might take anywhere from 3-10 years to complete. In the meantime, you have to hope you have picked the right employees and supported them enough that they are able to continue to grow the business.

The FACTS

  1. Management buy outs are complicated to set up. Get help to structure them and each party should have their own legal and tax advice.
  2. The valuation is based on cash flow.
  3. Growth is hard for the company when cash is bled off to pay you out instead of investing in resources needed for growth. Know your growth options. Build Plan A, B, and C. Read here about what happens when you don’t have contingency plans and uncontrollable events rock your best laid plans
  4. Sometimes part of the payout can be funded with debt. But be careful, if you don’t make your numbers each quarter, your banker becomes your boss pretty quickly.
  5. Employees have to make a long term commitment. You have to learn to think like an investor. You love the company but what future prospects will make it loved by customers?
  6. High gross margin businesses are better able to structure an MBO.
  7. Risk is shared by both parties so communication amongst all players has to be transparent with a lot of mutual respect and support. No one needs a lawsuit because you haven’t built a relationship where you have learned how to speak freely with each other.

MBOs need all the right ingredients to bare the hoped for fruit. Don’t become attached to expectations and outcomes: try several plans out before committing on the bottom line.

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