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.

Will you be able to sell your company?

Will the Great Boomer Business Retirement Migration Actually Happen?

“We’re ready to sell. You know, we’ve kind of done all we can and we’re tired. It’s time for some new blood. So my partner and I want $5 million out of the business. So what are our chances?”

We listened to Trevor a proud and accomplished silver haired 59 year old , the owner of a 15 million dollar industrial company and wondered whether he and his 58 year old partner, Paul realized what getting that exit buyout would require on their part.

“There is only one way you are going to find a buyer willing to invest that much in your business. It’s called Exit Planning and it may take 2-4 years to complete before you’re ready to sell.” I looked over
at my consulting partners as we watched Paul and Trevor’s faces fall. We had seen this reaction many times before.

There is nothing more painful than seeing successful business owners suddenly realize their retirement dreams might remain only a fantasy.

With every phase of life, the baby boomers have had a profound influence on the movement of money across most aspects of our economy. But in their next phase of development will their luck with creating wealth run
out?

The numbers suggesting this is indeed possible are staggering.

By 2011, the first of 70 million boomers are going to turn 65 years old. There are more than 26 million businesses in North America, and 50 percent are owned by boomers, according to the Small Business Administration. And 7 out of 10 of these owners will want to sell their business over the next 10 years, according to the Association for Mergers and Acquisitions Advisors.

That represents $10 trillion in retirement value and 75 percent of that $10 trillion may not be realized according to Richard Jackim in his book “The Ten Trillion Opportunity – Designing Successful Exit Strategies for Middle Market Business Owners”.

Industry Canada and the US Small Business Administration are very concerned that boomer business owners are not paying attention to these statistics and secondly do not have a good understanding of what it takes to sell a business. They have alerted city economic development groups across the country like the City of Nanaimo, BC and the city of Chicago, IL who are now trying to come up with ways to alert owners and help them to get ready.

They are planning for the future to ensure their communities stay economically buoyant according to Jason Boyce in an article entitled “Get Ready for the Big One: Succession Facilitation & the Coming Demographic Wave of Change” published in Making Waves Magazine.

Spirit West Management advises owners what must be done to 
set their house in order.

“It’s much more than succession planning,”
says Lorraine Rieger McGregor, CEO and partner in Spirit West
Management. “It involves reorganizing the company so that an investor
 sees the value. That sounds easy but really what is involved is to stand
 in the shoes of a buyer and ask yourself, would I buy this company? Can 
I easily see that it will continue to grow if the owner leaves so that I
will benefit as the investor? Succession planning is all about how you
 will retire. Exit planning is all about how the business will continue to be successful after the owners leave, which is all important to buyers.”

Rieger McGregor of Spirit West offers these five tips for business
owners who are starting to think about finding a buyer in the coming
 years. First Tip? Start NOW.

1. Change Your Mind Set
Let go of your business now, emotionally. It’s not a reflection of who 
you are; it is an asset that has investment value. The more you can view 
your business from the eyes of an investor, the easier it will be to
make the transition to improving it so it will be attractive to
investors. This is not to say stop being passionate about your business,
it says let it stand on its own two feet.

2. Think Like a Buyer
If you were to buy this company tomorrow, what clues would tell you that
 it would continue to be a successful company? What would you look for to 
tell you that if you didn’t know anything about the company? Buyers want
 to see past evidence of growth: The plans, the result and the effect on
profits. They want to know the industries your company sells to are hale
and hearty especially in this challenging economy. Are your customers 
loyal, buying more regularly and getting your best solutions? Do you
 have a sales pipeline leading to increased revenue? What tools do you 
use for decision making? All of these things show a buyer you run a 
tight ship.

3. Transfer Knowledge and Power
Who will run the company if you’re not there? Can you disappear for six
weeks right now and be sure the company will still be humming when you
return? If not, you’ve got work to do. You may need a management team or
a CEO. You may need to start training and trusting your own people a lot
more than you do now. When you walk into your operation is the
atmosphere tighter than a drum or congenial, tense or excited? How come?

4. Clean Up the Files
For the next three years you’ve got to show increasing profit margins in
a consistent, steady uphill line. That means you will have to clean out
the personal items in your expense account, know where you are missing
 the mark and losing money and fix the problem and then set goals and 
targets that your team is accountable for. Then look at your agreements 
and contracts and get them reviewed by a lawyer. Do your supply 
agreements restrict geographic territory or activities? Do you have the
best suppliers on your team? Are your shareholder and management 
agreements tight or misunderstood? Get the right kind of help to sort
these problems out.

5. Focus on Growth
When was the last time you expanded your market place, launched a new
product or rethought your solution set to better meet customer needs? Is 
it easy for customers to switch from your product to some other company’s?
If so, you better find out why. Get to know your target market. Are 
you solving their problems in the right way? There is opportunity for a
 profit in every hassle you uncover in their business.

Buyers want to see a healthy pipeline of orders and opportunities for
the future. “This is not meant to tell owners what they’ve built isn’t
good enough.” Says Rieger McGregor. “It’s to let owners know that there
will be a huge number of businesses all wanting to sell in the coming
 years. Investors will have their choice of plum opportunities and will
 reject the rest. They will pick the investments where their risks of
 failure have been reduced. Owners need to know how to make that sense of
certainty obvious and reliable.”

It can take 2-4 years to sort out some of these issues. The time flies 
fast. Don’t be resistant to this effort: There’s a business to run
 and there might not be “know how” or time to try and get these ‘value’ 
improvements done properly and without business disruption. But investing the time gives both you and your employees a bright and prosperous future.

Exit planning and execution is something owners will need help with. You may
 need a consultant familiar with exit planning that can help plan and execute these change. Your accountant can devise the best tax strategies. Your lawyer will iron out the agreements and contracts and your board of
advisors should be challenging your decisions and holding you accountable for implementing plans. Then you know you close to having a saleable business.

If owners want to see their retirement plans realized, the time is now. Over the next few years it will be a buyers market, with many more competitors wanting that big exit payoff too.

And what of Paul and Trevor. They are one year into their reorganization and have found a new passion for their business. They know what they want and unlike their competitors, they are well on their way to becoming the right acquisition target for a buyer.

And they aren’t tired anymore.

8 Rules for Preparing Your Company for Sale

1. Start Planning Early - 2-4 years before shareholders or partners want to sell. It can take that long for the changes described and recommended below to be made.

2. Know what type of Investor or Buyer is Best Suited for Your Company – Want to sell to your employees? Sell to another company in your industry or part of your supply chain? Want the company to continue as a viable going concern after you leave ? All these options require a different game plan to achieve the desired goal. Understand which type of buyer/investor is right for your circumstances and how to best position the company so that this exit event occurs.

3. Put a Growth Strategy in Place Now – Despite our tough economic times, a growth strategy is imperative to being able to realize a future liquidiation event, no matter what type of buyer/investor you are targeting.

4. Recognize the Buyer/Investor is Acquiring the Future – More than ever now, they are not buying past performance, they are buying the future performance of the management team’s ability to deliver on the promise of the growth strategy. So the growth strategy has to be be well under way and producing results by the time you are ready to sell. The management team that implements this strategy are the people that will be staying with the firm after the primary shareholders leave.

5. Recognize Your Role as Owner Has Changed – If you are planning to sell, you need think of yourself now as an investor, not an owner and certainly not a manager. Your knowledge, key relationships and abilities have to be transferred to and found in your management team now, not the day after you leave.  You are not your company.

6. Deliver What You Promise – The number of companies on the market looking for exit strategies will double as boomers retire over the next ten years. Your company will have to stand out from the pack. Your company should have an outstanding solution or product offering and the financial performance in the balance sheet and income statement to prove it out. Your internal systems deliver exactly what is promised to customers in a way that makes it hassle free, unique, of high value and delivers recurring revenue. Check in with your target market. What do they think about your offering? Set up key performance indicators to manage toward the future, rather than viewing only through the rearview mirror.

7. Difficult People? Conflicted Workplace Culture? Growth and Change Will Be Almost Impossible. If you’ve got some rub points that make delivering customer value or financial performance unreliable, now is the time to deal with them , not later. If you’re struggling to change entrenched ways of working, poor performance, lack of alignment between strategy and action, then get help sorting it out. Learn how to take a different approach and get to the heart of the issues that block change, growth and ultimately profitability. There is a much better way which is far less painful.

8. Get the Right Advisors on Board – You will need an accounting group familiar with exit transactions and tax issues, a legal firm able to prepare the foundation for an acquisition so the deal goes through smoothly without skeletons jumping out at inopportune times and investment advisors to help package the company. Know who to get on board, how to find them and strategize when you bring them in.

You may need help with some of these Valuation Planning Steps. Get it sooner rather than later. For a private seminar on any or all of these topics, please contact us.

Vancouver Sun on Boomers Preparing to Sell their Businesses

Harvey Enchin of the Vancouver Sun did a story on the fact that boomer business owners say they want to retire in the next three to five years, which means selling their businesses but they have not prepared their companies to get the highest valuation. Here’s the story. http://www.canada.com/vancouversun/columnists/story.html?id=c9388f05-f1c7-4960-812f-b6c8b15b454a Why do you think business owners are not doing adequate preparation to make their businesses attractive to sell? Add a comment below.

CBC talking about boomer business owners unprepared to sell their companies

It seems that slowly the word is getting out to business owners that they had better get the help they need to position their companies correctly in order to be ready to retire. The CBC just announced RBC’s latest study on the strange trend that owners don’t know how and are not thinking about how to extract the wealth they have built up in their companies. You can read about the latest study here.

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.

Selling a Business Case Studies

Why sell a business?

Our clients have myriad reasons.

One conglomerate bought several in a bundle and one of them did not fit their strategic direction. Another did want the responsibility of running it anymore.

When you are ready to sell there are suddenly a lot more things to think about than most owners would have ever imagined.

Getting Ready for Sale Case Studies

• If we want $8 million for our company when we sell it, what do we have to do now to get that price?
• Lame Duck or Worthwhile Investment?
• It’s Time to Sell

It’s Time to Sell

Case Study Project Description

An owner had spent ten years building a manufacturing company. He is struggling with growth and really liked the technical side of the business but wanted someone else to run the rest of the company and take it to the next level of growth.

Project Problem

How do you find the right partner and bring them in as an owner? Do you bring in investors? Do you hire professional management who manages you, the owner? Do you go public? Do you get bank financing for growth capital and equity financing from a new investor/partner?

Solution

The issues described are complicated for any business owner. As an owner, there is freedom to make decisions they way they want, and the trade off is keeping the status quo alive. Change is required. To bring in a professional manager means to let go of control as an owner but possibly enjoy larger shareholder returns brought by an able bodied team who wants to do what the owner doesn’t. By bringing in a shareholder partner, there are all kinds of chemistry and fit issues that money doesn’t necessarily cure. What works for one person in each of these scenarios might not work for other people.

Reviewing all the options with this owner, we explored the merits of each option including going public with a larger group of people. In each case finding someone who wanted to be in that business, had the financial capabilities and was good fit with the current owner proved difficult. Business plans were built, valuations done, opportunities presented but the right fit did not materialize. Standing aside for change is difficult when you’ve run the show the way you want for years.

Result

In the end, the owner decided to retain more middle managers who could build the market out, rather than trying to sell the company.

Lame Duck or Worthwhile Investment?

Project Description

This old-line manufacturer was acquired from it’s original parent company with several other consumer-based companies. The acquirer was in business to business products and wanted to re-sell the company as soon a possible.

Project Problem

When a large company gets acquired, this signals to the management team in the acquired company that change is about to occur. Many managers take this as an opportunity to leave. For this manufacturer, the entire top level of management left all at the same time. There was no one left at the helm and the acquiring company worked fast to second one of their executives to become the new president. But who was going to move into management operations? The new president went out to talk to the remaining employees and hand picked four middle managers promoting them to the top spots in the company. Their top selling sales person became the VP of Sales. The controller became the Group Manager. The manufacturing manager became VP of operations and a young woman in the marketing department who had a lot of creative ideas became the VP of Marketing.

In a company used to getting promotions based on seniority, the new president’s choices left a lot of disgruntled long time employees fuming on the sidelines. Was the company ready to be sold?

Solution

We were asked to come in and turn these new recruits into a leadership team who had to become responsible for chopping costs, shrinking the product line, staying competitive and forging a growth pipeline. The reward for doing all that? The team was told they would either be saved from the chopping block and kept as a unit for the conglomerate or spun out once again.

The team had no ability to work collaboratively. In this culture, the sales person had never visited the manufacturing floor. The people who made the product he sold did not know him. The marketing department had never gone to talk to the distributors who sold their product to understand the huge variety of target markets they worked with. The manufacturers had not talked to the distributors to see what types of products were in demand. The controller had never led a team or run a meeting. Collectively, they did not know how to make the decisions expected of them. The pressure was intense, the time frame short.

We worked individually and as a group with each, showing them how to change their attitudes and approaches toward building relationships across functional lines, with each other and with the market place. We challenged their thinking and entrenched methods of doing things in the same way and getting poor results. We focused on how to have the kinds of conversations that create rapport and results. Over a year period, this group of people dealt with downsizing, competitive threats, internal strife and the constant uncertainty about their future and found it in themselves to collaborate on all issues.

The manufacturing VP visited distributors. The VP of Sales got to know the guys on the factory floor. The marketing VP learned how to work with multiple target markets. The controller faced his limitations and steered the group through the quagmire of issues anyway.

Result

Within 18 months the team had achieved their goals. The conglomerate was impressed. They had turned the company around and now were prime candidates to be sold. This irony was not lost on the team. With the great results they were now an attractive business and yet faced an uncertain future yet again. The company was acquired quickly and the conglomerate achieved their return on investment. And in the end, history repeated itself: only one member of the leadership team stayed on with the new owner.

Next Page »