If you own a business and are thinking of getting out in the next few years, you might want to know your exit options. They are changing rapidly as the economy is on the decline and the number of boomers heading into retirement doubles the number of businesses for sale each year. This series illuminates the pros and cons of each type of liquidity option for business owners.
1.Â Management BuyoutÂ (MBO)
Pros â€“ Your team knows the business. This is a good option for family members working in the business. It can be done in stages so that there isnâ€™t a shock to the business or the buyer and seller.
Questions? Does the management team also know how to grow the business? Is your companyâ€™s balance sheet, income statement and future prospects strong enough to support this team to get bank financing or other investorsÂ toÂ fund the buyout?
Cons â€“ The MBO is rife with conflict of interest: The principal-agent problem and moral hazard can derail a company quickly if both parties havenâ€™t worked out an agreement to protect their own and the businessâ€™ interests. Managing the conflicts during and after is critical to success. Each side in the transaction should have their own coach or counsel. Getting financing can be tough and time consuming. It may mean that the owner gets paid out over time as long as the company keeps making its goals. And if the company doesnâ€™t?
Questions? What happens to the relationship you, the ownerÂ has with your management team during the negotiation process? If there is a fall out and you didnâ€™t have an agreement as to how you would behave during the negotiation and afterward, you could lose your team. Then what? You have to run the business yourself and spend at least a year training someone else (if you can find the right person) before you and your company are in a position to look for another buyer.
Financing for MBOsÂ may come from a bank or a private equity investor. Watch for the fact that the bank or the private equity investor may have different goals than the management team buying out the business. The management team has to have a crackerjack business plan for growth for a company that already should be growing. Be prepared for intense and detailed due diligence: investors want to know where the problems are and will be.