Under the right circumstances, a management-led buyout or MBO [1]
can address several important elements of a business ownership transition
including founder liquidity, business continuation, and job protection for the
business’ managers and employees. This strategy also tends to work better with
existing senior managers and a founder who is not seeking the highest possible
price for his equity.[2]
Here are two examples of successful closely-held company MBOs:
- A manufacturer of cryogenic handling equipment – The founders, advancing in age, had previously delegated day-to-day management to a group of senior managers. The ownership transfer was carried out through the combination of a new corporate bank loan to re-purchase the founders’ shares and the contribution of new equity to the business by the senior managers through personal borrowings secured by their personal assets. Future management bonuses were allocated to service these borrowings.
- A utilities construction specialist – Ownership of this $20 million sales company was transitioned to the two senior managers who had previously shared responsibility for the company’s operations. Initial buyout financing was provided through a bank senior loan guaranteed by the two managers, together with seller notes payable over several years.
Used properly, an MBO
structure can work wonders in a variety of situations.[3]
[1] This is
the fourth article in a series illustrating ways to “monetize
your equity.”
[2] This
article is intended for informational purposes only and does not represent tax,
accounting or other professional advice. Please consult your own professional
advisors before taking action based on the information presented herein.
[3] For the
new owners, however, the hard work begins after the deal is done. One of the
classic MBO success stories is Springfield
Remanufacturing Corporation, creator of The
Great Game of Business.
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