Sell a business to your own employees has its advantages. But think carefully about a management buyout beforehand.
Why sell to your staff?
There are various motives for opting for a management buyout. In listed businesses it is often a matter of selling a part that is no longer part of the core business. In SMEs, other issues play a role besides awarding a contract, says acquisition consultant Laura Schagen, partner of BuyInside. 'Entrepreneurs often don't want to sell a business to a competitor. Sometimes out of pride, but also to prevent the competitor from requesting all kinds of confidential information and then abandoning the deal.'
In addition, real estate can also be a motive for a management buyout. 'Such an entrepreneur would like to be able to rent out his business premises for a longer period of time. When selling the business to his own employees this often works, but with a strategic buyer it is sometimes difficult because they want to achieve synergy benefits and may not need the property.
Financing management buyout
Years ago, takeover consultant Willem van den Hoek Ostende supervised the management buyout of a business unit of a large concern. The parent company wanted to divest the activities and the incumbent manager showed interest. 'That man earned tons per year, so financing would not be a problem, the parent company suspected. Until it turned out that the man was living on far too large a footing, complete with a mansion and a stable of racehorses. He couldn't get one euro financed to buy a business.
In the end the business transfer was completed with the intervention of a private equity firm, but it does show that you should not misjudge someone's financial ability to buy a business. It is important to assess these as early as possible.'
Personnel have a favor factor
Not getting the financing right is the biggest danger with a management buyout, especially with the smaller deals in SMEs, knows Van den Hoek Ostende, director-owner of Company Brokers. 'Often a management buyout has to do with granting. The owner grants it to his employee to buy his business because he helped build the company.
Then that employee gets all excited about the plan, until it turns out he can't get the financing. Then you have a big problem as an entrepreneur. That employee, a key figure in the business, becomes demotivated and often drags the rest of the staff down with him. Because that employee is often too proud to say he didn't get it financed and so he tells them his boss wanted the bottom line.'
The owner is thus faced with a double problem. Not only is some of his staff demotivated, but also the chance of selling his business to other parties diminishes. And especially if the manager in question seeks refuge elsewhere after the business acquisition has fallen through.
Management buy-out requires a good atmosphere
Because the selling entrepreneur and the prospective buyer of the company know each other well, the process of business transfer in a management buyout often goes a lot faster than in other types of business acquisitions. But it doesn't have to be easier. Salient are the negotiations. "Emotions can get the upper hand," says Van den Hoek Ostende.
'Management buyout candidates can always threaten to resign and they know that by doing so they are putting the entrepreneur in trouble. At the same time, the entrepreneur knows how strong someone's position is. He knows his income and private situation and can judge whether it is a bluff or not.
It is better not to get involved in this type of discussion at all. If you play the game rock hard as an entrepreneur sell a business and fighting for every euro, you know you will get it back hard. But if you create an atmosphere in which you really grant an employee something, thanks to a good price or favorable terms, you are much less likely to be blackmailed. In any case, it is wise for both parties to be guided by an acquisition advisor so that emotions are less likely to play a role.'
Good to know: it is often said that the sales price for a management buyout - because of the favor factor - is lower than for a company sale to a strategic buyer. Yet the seller of a business does not always have to make concessions on price. 'A buyer of a business is often more interested in favorable terms. A sales price of one million with a subordinated loan of three tons is more attractive to banks than a purchase price of nine tons without such a loan. And so the financing comes around sooner.'
Management buy-out must not fail
The most important thing, Van den Hoek Ostende concludes, is to make an assessment of someone's financial possibilities in advance and only then decide whether to engage with an employee. 'If the risk of failure is too great, do not opt for a management buyout and look for an external, preferably strategic buyer. Because if things go wrong, a management buyout is a disaster for the business.
What you sometimes see is that a business is sold to a strategic buyer, but the entrepreneur thanks his employees by paying an extra monthly salary. You may not be awarding the business acquisition to the staff, but you are making a gesture.'
MBI and MBO as a combination
Not only a management buy-out, but also a management buy-in is an alternative to selling to a strategic buyer. Increasingly common is a combination of a management buy-in and management buy-out, known in jargon as a bimbo, in which the company's own management takes over the business together with a manager from outside.
'You see it, for example, when an older mt member does not want to join and there is no suitable person within the business to take his place,' says Schagen, who supervises management buy-in candidates. 'It also happens that there is a general manager, also 100 percent owner, along with a financial and technical director who are not a 'logical' general manager.
And so the business starts looking for a managing director from outside, usually an experienced manager with entrepreneurial ambitions. However, it is wise in such cases to have the team members take a personality test. It is also good for banks to know that the team is a good fit.'
