You want to buy a business. Then you are not alone. Research has shown that one in five people sometimes dream of starting their own business.
After having built a fine career within a large corporation over a period of ten to fifteen years, many people start to itch. They want to set their own course without constantly being accountable to a boss. Self-employment is therefore an attractive prospect for many of these managers.
In this article on management buy-in you will find:
- Why a management buy-in?
- Where do you start as an MBI candidate?
- This is the most important person in an MBI
- MBI roadmap: 10 steps to success
- How to finance a management buy-in
- The 11 biggest pitfalls in a management buy-in
Why a management buy-in?
The answer is simple: taking over a business is easier and involves less risk than starting up a company yourself. An existing business is basically a moving train: revenue, customers, suppliers, staff; it's all already there.
Taking over an existing business also has the great advantage of providing immediate income. Of course, the purchase must be financed, but knowing that mortgage and living expenses can continue to be paid as usual is reassuring to many aspiring entrepreneurs.
Where do you start as an MBI candidate?
Buying a business is an exciting, intensive and often emotional process. Moreover, it is not settled in a few months: an acquisition process takes a year to a year and a half on average.
Tip 1: draw up a clear buyer profile
Before you actually start looking, good preparation is essential. First, you need to know what you are looking for. Many prospective buyers search at random and respond to very different profiles on the Internet without a clear plan. Those who do not know what they are looking for will not find it. Another common mistake is that searchers are too quick to pin themselves down to a particular industry or company size. For example, the prospective buyer comes from the telecom industry and wants to buy a business in the same industry at all costs. This seems logical, but it also limits the options.
Tip 2: know your financial resources
Second, it is very important what your own financial possibilities are; whether or not supplemented by investors in the background who want to join you. Banks are currently reluctant to provide acquisition financing. Count on having to bring in at least half of the required acquisition sum from your own resources.
Tip 3: involve your partner, family and friends
Finally, in the preparatory phase it is very important to discuss your plans to buy a business with those closest to you. How does your family view your plans, what does your partner think? Do they understand what you want and why you want it, do they support you in your adventure even if it doesn't work out? If you are the breadwinner, do you have enough reserves to last for a while without income, and what is your plan B if the process takes longer than anticipated?
In practice, it still happens that the partner is involved far too late in the process. The prospective buyer is already busy with advisers, has even visited a business, and the moment the first negotiations start, it turns out that the partner does not support the plans. The buyer withdraws from the buying process with an excuse and relations with the advisers hired are ruined forever.
Discuss your plans with friends and your business network as well. The business search can be lonely and frustrating. It helps if your personal and business network knows what you are doing so they can support you if needed.
This is the most important person in an MBI
And let's not forget the most important person in this story: yourself! As mentioned, prepare yourself for an intense and intensive period. Especially if you also quit your regular job with all the securities and contacts that go with it, you will be thrown back on yourself completely.
Your surroundings can support you, an acquisition advisor and a good business network can help you, but ultimately you will have to do it yourself. After all, you are self-employed.
MBI roadmap: 10 steps to success
Achieving a successful management buy-in takes time, patience and effort. Brookz charts every action with a 10-step plan for a successful MBI:
1) Know what you want to buy: draw up a buyer profile. What kind of business suits you in terms of industry, type and size of business, region, risk and stage in the growth cycle? A buyer profile gives direction, focus and prevents you from unnecessarily wasting time, energy and money on businesses you are not really interested in. You also have a better story to tell toward acquisition advisors.
2) Engage the right advisers. The various stages of the buying process require expertise; consider enlisting help. Successfully buying a business requires a business perspective. Entrepreneurs often react emotionally during the sales process. Whatever advisers are brought in, you make the final decisions during a buying process.
3) Arrange tax matters. Set up a personal holding company that acts as the parent of the operating company(ies). In an acquisition with multiple shareholders, set up a joint acquisition BV, with personal holdings of the owners above it. This can then form a corporate tax unit with the operating company, offsetting profits and losses (including interest expenses) against each other.
4) Search and find the right businesses. The market for business acquisitions is far from transparent. Therefore, use as many sources of information as possible: profiles on the Internet, your personal network and approach advisers. Don't hesitate to approach businesses that are not for sale. Ultimately, almost every business is for sale. Consider a first contact with a seller (or his adviser) purely as an initial introduction. Don't mention amounts, don't criticize the business and don't start negotiations immediately.
5) Evaluate the business. Conduct a thorough, broad investigation of the acquisition target. Look at the business itself, the market, the products, the staff, the operations, the customers and suppliers, and the reason for selling. After your investigation, prepare a comprehensive questionnaire for the seller. Keep asking, don't settle for evasive answers. Compare the latest annual figures not only with historical figures of the business, but also with those of similar businesses in the industry. That way you expose discrepancies sooner.
6) Determine the value of the business There are roughly two approaches to valuing businesses: the accounting approach (such as rules of thumb) and the economic approach (such as the DCF method). Realize that ultimately only one number matters: not the value, but the price you pay for the business. Not only the perception of value plays a role here, but certainly also the buyer's ability to finance.
7) Negotiating the deal It is obvious that you don't just go into negotiations. You need to take a position on a number of things, namely: determine your limit, determine your objectives, determine your negotiating style and determine your tactics.
8) Dive deeper into the business. In this phase, you turn the business inside out.WAnt maybe the numbers were polished after they rolled out of the system? Maybe there is a chance of after-tax charges from the IRS? To answer all the questions, you conduct a due diligence, also called a book examination.
9) Arranging financing. Money is needed to close the deal. Nowadays you have to stack your funding to get the total acquisition sum together, using various sources of financing, such as equity, bank loan, vendor loan, investors, government schemes and alternative options. Come to the table with each lender well prepared.
10) Uncork the champagne. This step-by-step plan consists of 9 steps, but we don't want to withhold step 10: signing the purchase contract and uncorking the champagne. Congratulations, you own the business!
How to finance a management buy-in
Bank financing is still available for MBIs, but it is no longer possible on the basis of two A4 sheets and an old annual account. Years ago, a business acquisition worth several millions could be financed, so to speak, with an excess value of 150,000 euros on the house. Simply because the bank was willing to bridge the remaining gap - sometimes as much as 80-90%. But those days are over. Currently, banks are willing to finance a maximum of 50% of the total acquisition sum. So the other half will have to come from own funds and other sources of financing.
This means that in practice a mix of financing sources is needed - sometimes referred to as stacking or pizza financing - to complete the total financing package. That said, almost all acquisitions do involve a bank, as it remains the cheapest way of raising capital.
These are the most common ways to finance an MBI:
Equity
First and foremost, you cannot avoid using your own capital. Because it is very simple: if you are not willing to take risks yourself, why should a bank or other financiers? Banks, as well as investors, want you to show commitment. They want you to suffer when things go wrong, because only then will you put maximum effort into making the acquired business a success. In fact, a buyer who does not make a financial commitment may just be tempted to accept a nice salaried job and kiss his business goodbye.
The amount of the equity contribution is relative. A buyer who gathers a hundred thousand with all his savings, the excess value on his house and the sale of his shares and is prepared to put it all in, puts more at stake than a buyer who has a million in his account and only wants to invest a ton. No bank will want to shake out a buyer completely, but a buyer will have to put in a significant portion of his capital. The main sources of equity are savings accounts, stock holdings and the excess value on one's home.
Bank loan
Most buyers will not make it with their own contribution, so you must look for other means. The most obvious method of financing is a bank loan. A major advantage of a bank - as opposed to an investor - is that you keep full ownership of the shares and thus do not give away control. In addition, a bank loan is cheaper than capital from an investment company, which has much higher return requirements.
Vendor loan
In many cases, own resources and a bank loan are not enough to finance the entire takeover sum. The seller often offers a solution by providing a so-called vendor loan. Here, part of the purchase price is owed and converted into a loan. Often this loan is subordinated to the bank financing.
Investors
Another important category of capital providers are investors. Unlike financiers, they do not provide loan capital, but rather equity capital and subordinated loans. They become co-shareholders, which is why many buyers deal with investors only when there really is no other way. Investors, by the way, offer more than just money. Often they have a large network and knowledge of the market, from which the entrepreneur can benefit. The most important investors in SMEs are private equity firms and informal investors.
Alternative sources of financing
Due to stricter selection at the gate by banks, more and more financing alternatives have recently emerged. Although still in limited use for acquisition financing, these are the three most important emerging sources of financing: crowdfunding, credit unions and the private exchange.
The 11 biggest pitfalls in a management buy-in
Taking over a business via a management buy-in is complex and not without risk. Here are the 11 biggest pitfalls in a management buy-in:
#1 No clear buyer profile
Many people looking for businesses do not have a clear profile of what they are looking for. If you don't know what you are looking for, you will never find it. In addition, you can't expect an intermediary, bank or accountant to seriously help you if you don't know exactly what you want.
#2 Business too dependent on incumbent owner
One of the most important questions you need to find out: how decisive is the incumbent owner for the success of the company? Because it can all look great, but if the owner basically does everything alone, all the customers are tied to him, he is a leading figure within the world in which the business operates, then the business is extremely susceptible to a changing of the guard. Don't underestimate that.
#3 Underestimating financing
It is best to start taking stock of your financial possibilities at an early stage and to determine how much risk you are willing to run when taking over a business. Buying a business without contributing your own funds is a pipe dream.
#4 Falling in love with businesses
A common pitfall, especially for first-time buyers, is that they 'fall in love' with a business. They really like the company, think the seller is a nice guy and are blind to the weaknesses of the business because they are in love. As a result, they tend to give away too much in negotiations.
They believe too easily that no customers will walk away and that revenue will really be as high as the seller predicts. By now the negotiations are well advanced, making it difficult to pull the plug, both mentally and because of the costs incurred. At such a time, the buyer's position is weak. He is more likely to be willing to bridge that last gap between asking price and offer price, leaving the purchase price on the edge of what makes good business sense.
#5 Conduct your own negotiations
It is wise not to conduct the negotiations yourself. An adviser is not emotionally involved and has the advantage of not clouding your relationship with the seller. The negotiator is the bad guy, you the good guy. Annoying criticism of the business is not your responsibility, but that of your adviser.
The majority of transactions fail not because of the numbers, but because of a lack of chemistry. Emotions play an important role in the takeover process, especially if the seller is a DGA selling his 'baby'.
#6 Winner's curse
If there are several privateers on the coast, there is a risk of thewinner's curse. The buyer must and will get the business and makes an offer without questioning whether it is still commensurate with the value of the business. Some, highly sought-after businesses are sold by auction. Especially in such a situation, the risk of the winner's curse is maximized. By the way, as an MBI candidate, you have no chance in an auction. These types of businesses are sold to large strategic buyers.
#7 Anchoring
Another pitfall is 'anchoring' to the asking price. Those who take the asking price as their starting point may well pay more than is justified. If the asking price is a million euros and you end up with an amount of 800,000 euros, have you made a good deal? Yes, compared to the asking price, but not if, according to your own projections, you will earn back the purchase price in eight years. Therefore, never take the selling price, but always take your own valuation as a starting point.
#8 Too much knowledge
It may sound strange, but too much knowledge can also work against you. We'll assume for a moment that the seller hasn't put down an asking price; he'll let you come up with an offer. You have made a resounding business valuation based on an ambitious business plan and the DCF method, arrive at a value of one million euros and then make an offer of seven tons.
The seller, a baby boomer who has absolutely no understanding of these kinds of modern valuation techniques, used a rule of thumb, looked only at the past few years and had a price of five tons in mind. Your knowledge works against you in this case. The seller will eagerly accept your offer.
#9 Lack of personal contact
A pitfall that cannot be emphasized enough is an over-focus on numbers. Keep working on a good relationship with the seller. Keep talking to each other; it is crippling to the process if you don't hear anything for weeks. Suggest having dinner together, possibly with partners present, to make the contact more pleasant and take it out of the negotiating sphere.
#10 Sow confusion
Sometimes parties deliberately sow confusion during negotiations, as a tactic to make a profit. Is the conversation about the total purchase price of the shares, or only the goodwill? If the buyer pays off the company's current account debt to the seller's holding company, is that part of the purchase price or not? Are the parties talking about the legal transaction date (when the shares are actually delivered) or the economic transaction date (from when the results of the company are for the buyer)?
In practice, such misunderstandings often lead to tons of euros' difference in perceived takeover prices. Especially if they persist until a late stage, these misunderstandings can lead to major irritations and even the deal falling through.
#11 Implementing changes too quickly
Once you have bought the business, caution is advised. Don't go through the china shop like an elephant, antagonizing the staff. The good people will soon leave and you will be left with a weakened business that could soon be in trouble.
