Business owners spend many years working hard to build their companies, and the reward can often be a big future payout. However, there are precautionary steps to take when a previous owner looks to buy back his or her company.
“Don’t go repurchase your former business just because you feel guilty or you want to save jobs; do it because it’s a good investment,” says Michael P. O’Neil, a partner with Taft Stettinius & Hollister LLP.
Smart Business spoke with O’Neil about all the considerations former business owners should look at when jumping back in the driver’s seat of their old companies.
Is now a good time for someone to consider buying back his or her business?
It’s a great time to buy back your former business, as long as you still have the fire in your belly. If you are the former business owner, hopefully you got cash from the earlier sale of that business, but sometimes the owner might still be holding an ‘earn-out’ note. The ideal situation for a reacquisition is one where the business is still viable but there’s just too must debt on the balance sheet stemming from the earlier sale.
Why do you think a business that changed hands in the last few years might be for sale again?
Remember, many of these transactions were done in the context of very inexpensive debt financing and oftentimes with competing bidders. So the prices paid for companies just two years ago reflect earnings before interest, taxes, depreciation and amortization (EBITDA) multiples that now seem quite foreign. The good news for the prior owner is the acquisition debt may be maturing soon or even in default now; the bad news is, while the prior owner may get a good price on the business today, many lenders are feeling defensive and only making conservative loans, so proportionately more equity will be required for the repurchase.
Can you give an example of this EBITDA change?
Let’s say you sold your boat and RV component manufacturing business in 2006 for $42 million, representing a six-time multiple of the company’s $7 million EBITDA. Now, in 2008, with the boat and RV market down, that business might only have $3 to $4 million of EBITDA and, with a four-time multiple, you could buy it back for $12 to $16 million. The company still makes money, just not enough to service the $20-plus million in debt now on its balance sheet.
What kind of strategies can be used to buy the business back at a good price?
Depending on the company’s size, there is often a business broker or investment banker involved in orchestrating the sale. Usually, that middleman contacts the former owner as well as competitors, strategic buyers and other prospects. The former owner might consider buying all or a portion of the outstanding bank debt or mezzanine debt and employ a ‘loan to own’ strategy. Depending on the lender’s mindset, sometimes debt can be purchased at a discount to par, but the full face amount of the debt can then be used as ‘currency’ for the repurchase.
What kind of strategies can be used to stabilize the company in an economic downturn?
A company in the valley of a micro- or macro-economic cycle may need to take tough steps such as shutting down product lines or even entire plants, reducing head count, etc. Frankly, the former owner may prefer that the current owner implement those cost-saving measures before he or she buys back the business.
Is it wise for the buyer to leverage his or her financial standing to obtain financing if the company now has less than stellar credit?
The answer hinges on two factors: (1) Does the company have a steady stream of earnings that can support a certain level of debt funding, and (2) How much capital is the former owner willing to put at risk? In the example above, the former owner might have to put up 25 to 50 percent equity as part of that $12 to $16 million repurchase price, but, of course, everything is negotiable. Also, the stock market probably hasn’t done the former owner any favors lately, and he or she might conclude the business provides a potential for above-market returns going forward.
Any other words of wisdom for the former business owner?
Don’t go repurchase your former business for all of the wrong reasons; do it because it makes good business sense. And, don’t jump back in without talking to your spouse first!
MICHAEL P. O’NEIL is a partner with Taft Stettinius & Hollister LLP in Indianapolis who focuses on all aspects of business workouts and insolvency law. Reach him at (317) 713-3500 or firstname.lastname@example.org.