Management Buyouts: Selling to Senior Management

16 Feb Management Buyouts: Selling to Senior Management

Selling a business can be a challenge. In fact, the number of businesses that were sold in 2020 dropped by nearly one quarter, largely due to the economic downturn of the Coronavirus crisis.[1] But if you’re looking to sell your business, you may not be able to wait out a global pandemic.

In cases like these, it’s time to get creative. One possibility that is often overlooked is that the right buyer may actually be part of your own management team.

An Ideal Successor

Senior managers can be the best buyers for a variety of reasons, including:

• They know the company as well or even better than you.
• You already respect them and trust them.
• They are already invested in the business.
• They are comfortable with the risks of the company because they are already familiar with it.
• Your other stakeholders – customers, suppliers, employees, and lenders – are likely comfortable with your senior managers already.
• You have an opportunity to prepare them to take control of the business over time.
• They are likely familiar with your processes and procedures.

Advantages

There are several advantages to selling your business to someone from your management team, including:

Business continuity. For those who care about the business as an independent entity, a trusted employee is the successor most likely to follow in your own footsteps, maintain the existing company culture and take care of current team members. In the hands of your current management, your business continues to thrive seamlessly.

Less hassle. Selling to an outsider means spending a lot of time chatting with potential buyers, many of whom will never follow up with you. A trusted employee, on the other hand, is already familiar with your business and understands why it’s a great opportunity. The sale often moves along more easily.

Smoother transition. Because the company’s staff, customers and vendors already know your management team, not only does the sale itself go through more quickly, but the transition to doing business with the new owner also progresses naturally. You also may not need to provide extensive training, since they are already on the inside.

Fewer mistakes. Third-party buyers who acquire shares over time often make a mess of the business. With management buyouts, on the other hand, the selling owner-manager is often involved longer and is better able to step in to resolve problems.

A better deal. If the owner-manager is financing it, the deal can be structured to provide benefits to the selling owner-manager that would not be available from a third-party buyer. Management buyouts are usually earn-out based with vendor take-back financing—two factors which usually result in a higher sale price for the business.

More control. If you aren’t ready to leave the business immediately, this option leaves you with more control. The transition can happen quickly or over time. There is less need to come in and immediately make changes. You can maintain control of the business until everyone is settled.

If you’re looking to sell your business, remember that your best option may be sitting in the office down the hall. Take a look around and see who’s looking for a bigger challenge.

To learn more about transitioning your business, contact us.

[1] https://www.bizbuysell.com/insight-report/

Joel Rose

With over 35 years of experience, Joel Rose helps families – and their businesses – to prepare for the future. He offers guidance and support to help his clients create estate plans and succession plans that meet the needs of the whole family. Through his extensive professional and personal experience, Joel is known for his compassion and his ability to find a creative solution to meet each family’s needs.