The Right Exit Strategy – Management Buyout?

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. Management Buyout (MBO)

Pros – 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 isn’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 company’s balance sheet, income statement and future prospects strong enough to support this team to get bank financing or other investors to fund the buyout?

Cons – The MBO is rife with conflict of interest: The principal-agent problem and moral hazard can derail a company quickly if both parties haven’t worked out an agreement to protect their own and the business’ 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 doesn’t?

Questions? What happens to the relationship you, the owner has with your management team during the negotiation process? If there is a fall out and you didn’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 MBOs 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.

How to Prepare a Company for Sale

The Wall Street Journal has a great website on many issues about selling businesses including the weighty competing agendas of what to do with a family business .

Also at the Wall Street Journal site are a series of webcasts called SmartMoney TV This series is well worth listening to.

How Leadership Training Helps the Bottom Line

Much has been said about companies needing ‘the right management’ team. But what does that term mean really? To understand the concept it might be useful to know the difference between managing and leadership and remember that it is the people performing the work under the right leadership that make or break the bottom line.

Managers set the strategy and work with staff on the action plan. Leaders set the vision for how this work should be done and where the company should be philosophically, financially and strategically once the project is complete.

Leaders mentor managers by respectfully holding them able and accountable. Managers delegate and work with staff to ensure they have the resources to do the work. Sometimes the best leaders are staff members. Sometimes those people with leadership titles don’t know how to do more than manage, nevermind mentor.

In our work, we’ve found that the hardest thing for manager/leaders to do is to delegate… to stop thinking others don’t do it as well as they do. Many managers think you should be able to show someone something once and then get mad at them the second time when they ‘don’t get it’. People should just know how to change how they work by being told what to do. I hate to be the bearer of bad news but humans don’t work that way. And neither should managers who want to be leaders.

If your management team isn’t getting results and gets more resistance than progress, read this article about how leadership training helps the bottom line.

Not everyone is born knowing how to take on the these two roles.

Does Leaving the Business to Family Continue to Build Wealth?

Apparently not, says Tom Deans, a former business owner who has been president of a large family business for almost a decade. Only a third of family businesses (90% of businesses today are family owned) succeed in passing along a business to the next generation and continue to build wealth. Why? It’s an emotional issue. If you’ve received the gift of a business, its very hard to sell it. Secondly, the responsibility of continuing the notion that they must leave a legacy makes wealth extraction very difficult. Thirdly, sons and daughters may lack the skill sets, the passion, and interest to effectively operate the business.

What’s the best solution? Sell the business, don’t gift it. Give money, not a business. The company should be valued at a fair price and if the next generation wants to buy in, then that is a more successful transaction, says Tom Deans. Read more from his book “Every Family’s Business” to understand how to communicate succession planning issues amongst family members.

David Lam

David Lam
Vice President with the Deloitte & Touche Corporate Finance Inc
Vancouver

David focuses on mergers, acquisitions, and debt & equity financing. Over the past year, David has completed 10 transactions in the Vancouver market. Previously, David was at TELUS Corporation where he held senior roles in Corporate and Business Strategy Development.

In these capacities, David advised executives on new business opportunities and critical corporate-wide strategic initiatives. In addition, David assisted and lead on various divestiture and acquisition mandates.

Prior to TELUS, David was the CFO for the Bailey Group of Companies, which included retail companies such as Liberty Furniture and WA-2 Water Company.

Industry and Functional Experience

• Consumer Products
• Technology
• Manufacturing
• Growth Strategies
• Capital Markets Strategies
• Acquisitions
• Divestitures
• Debt and Equity Financing

Selected Relevant Experience

• Assisted in buy side and sell side M&A advisory in the education sector
• Assisted the recapitalization of a BC based confectionery company
• Assisted in the sell side advisory for a leading specialty manufacturing company to a US public buyer
• Assisted in the sale of a building supply company to a large US publicly listed competitor
• Provided valuation and sell-side advisory to a publicly traded telecom compan

Click here to see all the speaker biographies.

Paul Corcoran

Paul Corcoran
Commercial Banking Area Manager
Bank of Montreal

I have been a banker for 32 years. In my current role I lead a team of Mid-Market Commercial bankers whose role is to bring new commercial banking relationships to the Bank, as well as promote the Bank within the business community. Prior to becoming a banker, I referred professional hockey with the World Hockey Association.

I am a graduate of Simon Fraser University where I graduated with a major in Economics and a minor in Commerce. I am a Fellow in the Institute of Canadian Bankers.

I am a Past President of the Westbank Chamber of Commerce and have been a Rotarian for the past twenty seven years. I am also actively involved as a TEC Associate – working with Chief Executives in a consultative environment.

My outside interests currently include the theatre, travel and golf.

I am married with two adult children. When my children were younger I was actively involved with youth sport.

Click here to see all the speaker biographies.

Business Owners Must Think Like Investors

Business owners today are facing a perfect storm of controllable uncontrollable variables. But according to the Canadian Federation of Independent Business, 52% don’t know they need to take themselves out of harms way.

Think of the situation before Hurricaine Katrina: some people believed it was important to leave the New Orleans area, and some did not. Those that did not suffered and the rest of us were left wondering what it was that didn’t compel them leave New Orleans when they had the chance. Today, three years after Katrina, when the forecasters yell Hurricaine, the residents along the Gulf Coast don’t think twice, they go.

What’s going to galvanize business owners into getting ready to avoid the perfect storm?

The boomer bulge, born 1946 through 1962 will spend the next ten to fifteen years extracting their wealth out of the economy to put to other uses. Or I should say, attempting to extract their share of their company’s value. The only problem is, owners have not prepared their businesses so that they are attractive for investors to acquire them.

A perfect storm of influences will increase the supply of companies for sale right when the need is greatest for investors to buy them. The storm is manageable, but only if owners take preventive action now to be ready. It can take 2-3 years to put the company on a growth plan. It’s more than just slapping a coat of paint on and installing granite counters.

Here are the big clouds on the horizon for this perfect storm:

1. The economy is in a decline;

2. There are more than 1.7 million businesses in Canada. 50% are owned by boomers. 500,000 will want to sell. In any given year in Canada, roughly 25,000 businesses change hands.

3. Owners don’t like thinking about the day they won’t own the business

4. Owners don’t know who to talk to. It’s understandable that they don’t talk about it. They don’t want competitors or employees to find out they’re thinking of transitioning their ownership.

Business owners need to take heed and learn how to see their organizations through the eyes of an investor: get to know the key indicators they look for and make sure they are instilled throughout the company. Remember, an investor buys the future certainty of profitability, rather than the past. For every foggy indicator, the risk increases and so the price they are willing to pay decreases.

Spirit West CEO on Raymond James’ Radio Show “It’s Your Money”

Lorraine Rieger McGregor was interviewed by the “It’s Your Money” radio hosts, Raymond James’ Randy West and Gregg Collier for WLBE AM790.

 

Lorraine Rieger McGregor was interviewed by the “It’s Your Money” radio hosts, Raymond James’ Randy West and Gregg Collier for WLBE AM790.

The 25 minute show on how business owners can adequately prepare the business for the highest valuation focused on the fact that with the baby boomer boomer bulge nearing retirement, the number of businesses coming up for sale is set to increase by 100%.

This fact means those company owners wanting to sell or transition ownership will have to do a lot more than just “paint and install granite counters” to find an investor willing to buy them out or a lender able to bankroll a management buy out.

click the icon at the top of this article to play the radio show

Seminar – Frequently Asked Questions

The Seminar: How to Maximize Your Company’s Worth: The CEO’s Guide to Becoming Prepared for Investment

How is this seminar different than others on Selling your Business?

Succession planning you do for yourself. Valuation planning you must do for your business so that investors have certainty your company will be a profitable investment going forward. This seminar gives you an in depth analysis of how your business makes sense to an investor and where and why it might not give you the value you had hoped for. Wouldn’t you like to know how to be attractive to investors before you put your business on the market? For every element that is lacking in your company, the value of your business decreases. This seminar puts you in control of insider information that rarely gets shared with you until its too late to do anything about it.

Is this seminar about Succession Planning?

No. This seminar is about getting your business investor ready. It is what we call Valuation Planning. Succession planning is about getting you personally ready to retire. Take this seminar 2-3 years before you start thinking about retiring and you will retire profitably. Succession planning only gives you a limited perspective on how to get ready to retire. This seminar focuses on how investors will view your business.

What is Valuation Planning?

Getting what you want for your business is not easy. Investors have a very different perspective on value than you do. There is no multiple listing service of comparable companies to yours that helps an investor determine value. They look through a number of different ‘filters’ or ‘lenses’ looking for the key indicators that tell them this is a company that will make a return in the future. The more points of value that are obvious, the more an investor assigns to the valuation – the price they are willing to buy the company for or the amount they are willing to lend for a buyout. Valuation planning let’s you see your company through the eyes of an investor to determine where your operation may bleed value (and therefore the price you may be offered) and how you can remedy these ‘leaks’.

Why is this seminar limited to companies with revenue over $8 Million?

Most simply, our investor network is interested in businesses of this size. We work with investments bankers that help businesses get acquired by private equity or corporate investors. Large businesses have a lot more preparation work to become investor ready than smaller businesses.

What will I learn that I don’t already know?

At the end of the day, you will have an in depth self-assessment on how prepared your company is to be sold for its maximum valuation. You will know where your weak points are, why they are problematic and what you can do to change these elements to increase your company’s attractiveness to investors.

I want to attend but I don’t want people to think the company is for sale.

We only go on a first name basis during the seminar. We guard your registration information and do not share it with anyone outside of our firm. There is no attendee list available at the seminar and no “at the door registration” to protect your privacy. Talk as little or as much as you want during the day. The choice is yours.

Who can attend the seminar?

Company owners and their CFOs who have revenues of $8 million or greater in the last calendar year.

Will I have one-on-one time with the seminar speakers?

All our speakers and consultants will be available after the seminar at the reception.

What is your cancellation policy?

If we don’t hold the seminar on the advertised date and you cannot attend the re-scheduled date, we will refund your money in full or you may opt for one-on-one meeting to learn the same material from the workshop.

If you cancel:

15-30 days prior to the date of the seminar, 50% refunded or your fee can be applied to the next seminar.

14 days prior to the seminar, no refunds are given but your fee can be applied to the next seminar or a one-on-one meeting to learn the same material from the workshop.