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.

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