Taking over control Featured

7:00pm EDT December 26, 2010

Have you ever thought of leading a management buyout of the company or division you are running? Now could be the ideal time.

You should consider leading a management buyout if:

  • The owner is absentee or is thinking of selling
  • You and your team drive the growth, and customers would follow if you left
  • It is a noncore division of a much larger (preferably public) company
  • It has done well over the past few years and/or is positioned to do well going forward.

Here are the key steps in leading a management buyout:

Find the right financial partner. This is your first, and absolutely most important, task. Unless you have adequate capital and experience in buyouts, your most likely financial partner will be a private equity professional or fund. There are literally thousands of private equity funds. So a good place to start is a referral from a certified public accountant or lawyer whose practice includes buyouts.

Your financial partner must have sufficient capital as well as a track record of successfully closing transactions of similar size and type. Equally important, the right partner must be someone you trust and are comfortable working with. Unless you bring a majority of the capital to the transaction, it is likely your financial partner will have control. So spend time with your financial partner candidates. Call leaders of their current and prior investments. Ask how the partner keeps his or her word, how he or she works with leadership, how he or she adds value and how he or she responds when things don’t go as planned.

Our firm views investing as “betting on leaders” and treats our leaders accordingly. Find a firm that truly lives that philosophy, and it will serve you and your company well.

Structure both of your deals. Once you select your potential financial partner, you have two transactions to negotiate: one with your financial partner and one for the purchase of your company.

For the financial partner deal, your team’s invested dollars should be treated exactly the same as the financial partner’s investment — with the same rights, preferences and priorities. Second, you should clearly define how the board will be governed and under what circumstances the board could terminate you or a member of your team. This is typically done with performance hurdles, about which you must feel very comfortable. Third, there should be a significant additional financial incentive if you perform at or above expectation.

For the company deal, your financial partner should add a lot of value and your collective efforts should be well orchestrated. One of the most important decisions is who leads the negotiation with the seller. Whether your financial partner stays completely in the background or takes the lead depends on the type of seller and the relationship between the seller and your management team. Also important is how much debt will be used in the transaction. Some private equity firms will use as much debt as is available. Our firm only uses the amount of debt appropriate for the company. Typically, this will not exceed 2.5 times the trailing 12-month EBITDA.

Close and create a lot of personal wealth. If Steps 1 and 2 are completed properly, you will position your company to realize your vision. Equally important, you will position you and your team to create some well-deserved wealth.

Dan Lubeck is founder and managing director of Solis Capital Partners (www.soliscapital.com), a private equity firm headquartered in Newport Beach. Solis focuses on disciplined investment in lower middle-market companies. Lubeck was a transactional attorney and has lectured at prominent universities and business schools around the world. Reach him at Dan@SolisCapital.com.