When Managers Become Owners
by Michael Collins
Many business owners are interested in selling their company to their senior management team. These individuals have helped build the company over time and no one knows the company better. The problem is the typical senior management team lacks the capital to acquire the company for which they work. A management buyout (MBO) provides the means for a management team to undertake an acquisition, with capital assistance from a private equity (PE) investor. The most recent example of an MBO in this industry is the investment by ShoreView Industries in MI Windows and Doors. In that transaction, the PE fund acquired a minority stake in the business, something an increasing number of funds are willing to do.
Pursuing an MBO
Making investments in conjunction with management teams helps PE funds address some of the toughest risks in making an acquisition. Every selling owner paints the same picture. Each says he is not needed for the success of the company, but is it true? Will the management team work as hard for a new owner, or will they seek greener pastures? An MBO, especially one where the selling owner maintains some ownership, elegantly addresses these concerns.
Companies where the owner has already begun to back away from the business, by delegating significant amounts of authority to senior managers, make ideal candidates for a management buyout. Other owners may have promised their senior managers “someday, you’ll own this place,” without having a real plan in mind for how to accomplish that ownership transfer. As time passes, these owners may find themselves considering the sale of the company to a large strategic buyer. This is highly unlikely to result in the management team having actual equity ownership in the business post-sale (although management incentives may mimic some of the effects of equity). An MBO would leave the managers with ownership and make up for a good transition plan that became delayed.
Most sellers want their managers to have better opportunities after a transaction. Sellers would seldom be happy to know that a buyer planned to be the new broom that sweeps the management team clean. There is somewhat less risk of this happening in a sale to a private equity buyer, whether or not it is structured as an MBO. PE funds avoid the risk of replacing key members of management. Typically, they also lack an internal bench of management talent they are seeking to promote out into the acquired company, as is often the case with a strategic buyer.
Concern for the management team notwithstanding, the seller will select the buyer that makes the best overall offer for the company. Members of a management team should be cautious regarding their initial approach to discuss the owner’s possible interest in a management buyout. It is important to make it clear that the inquiry is just that, an inquiry. It is critical to avoid the appearance of an ultimatum or a mutiny. It must be clear that the senior managers are willing to continue in their current roles if the owner rejects pursuing an MBO. Depending on the owner’s goals, though, an MBO might be an ideal and profitable solution for all involved.
Michael Collins is an investment banker and a partner in Building Industry Advisors. He specializes in mergers and acquisitions in the door and window industry.
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