Regularly talking to managers wanting do a management buyout or leveraged buyout, one of the most difficult parts of the process is approaching the owner to ask for that opportunity. While many have the endorsement of the owner from the beginning others have to go ask for it. Facing a ‘chicken and the egg’ scenario managers don’t know whether to seek a possible financing partner first or approach the owner to ask for the opportunity.
Most buyout or private equity firms encourage managers to seek them first by rationalizing that the private equity firm can better negotiate the purchase price and make managment look like a qualified buyer in the eyes of the owner. But for a variety of reasons it is far better for managers to talk to the owner first then seek possible funding altneratives.
First, it is much easier to bring up the subject of a buyout, if a manager can ask in passing and little real work has been done to that point. The key is for managers to get ‘permission’ to proactively look for funding alternatives. From that conversation managers will get a telling window into whether the owner wants to do a buyout or not. My experience has been that such discussions go bad or good depending more on the owner than whether a manager has lined up possible financing.
A much more important reason to start with the owner is to give managers plenty of time to competitively shop for financing. Assuming an owner gives permission, managers will want plenty of time to shop every possible alternative because the cost of the financing and most importantly how much ownership and value management ultimately receives will vary substantially from one financing source to another.
Most buyout or private equity firms encourage managers to seek them first by rationalizing that the private equity firm can better negotiate the purchase price and make managment look like a qualified buyer in the eyes of the owner. But for a variety of reasons it is far better for managers to talk to the owner first then seek possible funding altneratives.
First, it is much easier to bring up the subject of a buyout, if a manager can ask in passing and little real work has been done to that point. The key is for managers to get ‘permission’ to proactively look for funding alternatives. From that conversation managers will get a telling window into whether the owner wants to do a buyout or not. My experience has been that such discussions go bad or good depending more on the owner than whether a manager has lined up possible financing.
A much more important reason to start with the owner is to give managers plenty of time to competitively shop for financing. Assuming an owner gives permission, managers will want plenty of time to shop every possible alternative because the cost of the financing and most importantly how much ownership and value management ultimately receives will vary substantially from one financing source to another.
As an example, we had a client management team that sought financing and we helped them get seven financing proposals with management’s equity stake ranging from 49% to 100% of the company stock after closing. Clearly, management wanted 100%, but getting to that point, required a competitive shopping process to do it.
Ideally, doing a management buyout, like business, becomes a team effort with the owner’s input clearly taking a driver’s seat. But by starting with the owner's consent, management is then in a driver's seat to put the pieces together to get the best possible deal for themselves while giving the owner what he or she wants.
Ideally, doing a management buyout, like business, becomes a team effort with the owner’s input clearly taking a driver’s seat. But by starting with the owner's consent, management is then in a driver's seat to put the pieces together to get the best possible deal for themselves while giving the owner what he or she wants.
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