Insights

As the owner of a closely-held business, you have many options when looking to make a transition toward retirement. One of the most natural choices for a company with a strong management team in place is a Management Buyout (MBO). MBOs, like most transaction structures, have advantages and drawbacks to consider.

Advantages:

Maintain Continuity:

An MBO can help maintain the continuity of operations and ensure the customer experience is relatively unchanged. Under your guidance, your management team has experienced the company’s struggles and successes firsthand. They also have intimate knowledge of day-to-day operations. Selling your company to the management team harnesses that knowledge for the future benefit of the business.

Maintain Confidentiality:

An MBO can be a great alternative to selling your business to a strategic buyer because it eliminates the need to disclose confidential information to competitors. Strategic buyers with ulterior motives could accept your disclosure of proprietary information as part of the due diligence process and then not proceed with the transaction, leaving your business in a vulnerable position.

Reward Your Team:

A Management Buyout gives you the opportunity to reward your most loyal and effective employees for their previous hard work and their continued dedication in the future. An MBO displays your confidence and trust in the management team and incentivizes their future performance with equity. For them, it’s also a less risky, more accessible path to owning a company, since they have an existing level of comfort with the operations and viability of your established business.

Drawbacks:

Management Can't Always Afford a Complete Buyout:

Unless they’ve been anticipating the transaction for some time, managers are often under-capitalized when the opportunity arises. That could lead you to consider a Leveraged Management Buyout (LMBO), where the managers use the company assets as collateral to obtain debt financing. They could also obtain debt using personal assets, such as their homes, or other personal guarantees. These options carry an entire new set of drawbacks to consider.

How we can help: As a partner to the management team, Georgia Oak can provide the additional capital needed to facilitate a Management Buyout and eliminate the obstacle of obtaining debt financing. We also have a keen interest in companies deemed "too small" for traditional private equity firms who might offer a similar avoidance of debt to larger companies.

Navigating a Sale to Employees Can Cause Tension:

Selling your company to your employees often introduces an element of uncertainty in the relationship until after the ink is dry. Agreeing on the value of the company and the structure of the transaction requires thoughtful, in-depth and perhaps painfully honest conversations about the company you’ve worked hard to build. Negotiating the finer points of the sale can cause tension in an otherwise great working relationship.

How we can help: Having a partner like Georgia Oak involved in the transaction offers a “buffer zone” for the negotiations. We can help the entire group navigate some of the more emotionally-charged elements of a sale. Our team’s experience in completing transactions provides a framework for the entire group to focus on the points that truly matter and conduct objective proceedings.

Management Know-how Doesn't Always Translate into Ownership Know-how:

Great managers don’t always equal great owners. After the sale, managers must change their thought patterns and begin to approach the business with the mindset of an entrepreneur. This shifting of gears from working for a company to owning that company doesn’t always play out as planned, and can leave new owners feeling overwhelmed and under-prepared to succeed.

How we can help: Georgia Oak Partners helps alleviate this by providing support from our experienced operators. Our team is a resource in areas where management teams may not have expertise, such as corporate finance, acquisitions, strategy development, human resources, sales and marketing, navigating vendor relationships and others. Our goal is not to take over day-to-day operations of the company, but rather to support the management team in critical areas to increase the company’s growth potential.

If you’re considering a Management Buyout of your Georgia-based company or have questions about the process, we’d love to hear from you. Contact us to begin a confidential conversation.