Tue Feb 4, 2014 12:01am PST
In the next five years, PwC forecasts 300,000 small-business owners in B.C. will retire or sell their businesses. That number is predicted to rise to almost 600,000 owners in the next 10 years. Who will take over all of these businesses? In many cases, it may be people like you: managers working in the business or in a related company. If this is of interest, here are the steps to take to complete a management buyout.
1) Finding the business you want to buy
In today’s sellers’ market, a perfect match can be hard to find. Instead, have a practical approach to what you can buy. This usually means starting close to home: perhaps you’re already working at the business or know of someone in the industry who is approaching retirement. Go through your suppliers, customers and competitors. Not only will you be able to make a warm approach to the owner, if you eventually succeed in buying the business you are more likely to succeed because you understand the market.
2) Positioning yourself to become an owner
The goal here is to establish a trusted relationship with the owner, because the sale of a business is not just financial, it’s about an owner’s legacy and looking after employees. You can do this by working for the owner, proving yourself and building rapport. You need to know the owner is planning to retire within five years and that they may sell to you. By assuming a key management role, you will become an attractive buyer and build credibility with private equity investors or lenders who may back you. Negotiate an ownership plan, perhaps by buying a minority position today, together with a timeline to buy the rest. This may include a right of first refusal or a shotgun clause.
3) Making the offer and due diligence
Before pulling the trigger, you need to do thorough due diligence: analyze the financial statements and understand the company’s competitive position and why it is profitable. Figure out how you can grow the business and look for risks. Valuing the business is usually done in one of three ways: an asset valuation, multiple of earnings or discounted cash flow. Seek advice on what comparable businesses have been sold for. Obviously, you want to pay with a margin of safety in case all does not go to plan. In drafting the offer, seek advice from a good lawyer who is experienced in doing deals.
4) How to pay for it
There are many financing options, including buying the business outright or paying for it over time. Both have risks. If buying a controlling position, financing can come from financial institutions. Using senior debt to finance assets and subordinated debt for the goodwill, you can usually finance 60% to 70% of the business valuation. The rest will come from your equity and possibly vendor finance. For larger companies, consider partnering with a private equity firm, but this will reduce your share.
5) Closing the deal
Closing the deal should be straightforward if you have the right partners and advisers and a motivated seller. But things can go sideways, so maintain deal momentum. Follow up, deliver on promises and keep everyone moving to the finish line. The work you have done before to build trust will pay off when there is an unexpected hiccup.
Owning your own business is a lifetime dream for many, and with the looming supply of retiring baby boomers selling out over the next 10 years, together with sources of finance to complete, it is a possibility many managers can pursue. Be patient, but move forward with purpose. •
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