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.

Should I Sell Now or Rejuvenate my Business so it is Saleable?

Many people ask us whether this might be a good time to sell their company. Has the economy stabilized enough to make it worth their while? The short answer is, now is as good a time as any. But the question you really should be asking has nothing to do with what is happening in the economy. The right question should be “Is your company in saleable condition?” It is definitly the right time to rejuvenate and strengthen profitability so that in a year or two, your company is worth buying. And in the meantime, you will be rewarding the current investors… you!

So if you have been cutting costs and waiting in your comfort zone until buying cycles pick up, in hopes that you can survive till then, you have been playing the wrong game. Waiting is the least powerful thing you could do right now. If you really want to be in saleable condition, you need to get up out of that chair and learn how to add more tools to your bag of tricks beyond cutting expenses and paring back staff. Here are the three most powerful things you can do to improve your return on investment that will also help you start down the path of being a company and investor would actually want to buy:

1. Get Back to Basics: GIVE VALUE. Focus on standing in the shoes of your customer. What do they need that would improve the value they receive from your company and what would remove the hassles of doing business with you. Now is the time to innovate your product by building better service around it, helping solve the right problem for your customer. Get out in the field and start learning what frustrates them and then find a way to relieve that frustration. Give back. Be generous. Your efforts will be rewarded.

2. Think Bigger: NOT SMALLER. Build up your gross margin. Think of rounding up prices and mark ups. Do not give volume discounts, solve problems for customers instead. You will never make back a price discount with volume.

3. Forge Partnerships: JOINT VENTURE. You need to get to a broader market. Where can you add value to another company’s product or service? Team up.  Bundle up. You sell their product to your channel, they sell yours to their channel. Now you both have a broader distribution channel. Keep each other warm this winter and it will pay off in spades come spring.

And while you are doing all that, start learning a lot more about what it takes to become saleable. It’s a lot more work than you think. Start by taking this quick quiz from the Globe & Mail It’s your time to get ahead of all the other business owners who prefer their comfort zone over the fast lane.