Steven Covey’s Second Habit of highly effective people:
Start with the end in mind.
Most businesses don’t start with an end in mind. Many of them start almost by accident and those that survive and grow are often too busy in the day to day battle for survival to consider an exit.
If you do nothing the chances are that your business will not continue without you.
Received wisdom is that 75% of businesses do not sell, and that only 8% sell for a premium. If you do nothing, the chances are you will not be able to sell your business.
Your business may represent your life’s work.
It may represent the future for your children.
Its success is certainly down to your investment, not just in financial terms but also your emotional investment. You’ve invested time, sacrificing personal and family life over the years. All those “investment” factors have been integral to developing and growing your company – and creating the value it has today.
Ideally, from the day you began your business, you should have planned how and when you would exit and what would be the exit route. If you are raising money, especially equity finance, you’ll need to have an exit route for your equity funders.
How do you exit?
There are many ways to exit your business, but the key to choosing the right route for you is to identify what you want from the sale.
For many owner managers, the continued employment of the team who have helped grow the business and the continued success of the business carry a significant value.
These are broad categories and are by no means mutually exclusive.
One way of ensuring the future of the team – or at least giving them control of their destiny – is a Management Buy-Out (MBO). There is a chapter on MBO’s in the book, but here is an overview from the sellers’ perspective.
MBO deals are often quicker than a sale to a third party as the buyers already know the business, but there are some disadvantages to consider:
- An MBO team is unlikely to be able to match the value offered by a trade buyer as they will not achieve any savings by combining businesses.
- The MBO will probably have to take on debt (or even equity) financing from a bank or other financial institution. This is a significant commitment for the management team and will almost certainly require that they put personal assets at risk.
- The vendor will have to accept payment over a longer period of time, so that it
- is not a clean break from the business which is now run by someone else – even though they are still using your money!
- Consider the fall-back position. How will the relationships between you (as the owner) and your management team (as prospective buyers) work if a mooted deal fails to materialise. Will the business be damaged by a management team with poor motivation?
- Is your management team up to the job? MBO deals have a very strong track record of success and are consequently relatively easy to finance, but often in the smaller business the vendor has been the entrepreneurial leader. That leadership is a vital part of the team which may not be a characteristic of the remaining members
“Why is this a potentially attractive route for Vendors? Depending on their involvement, the employees should already possess considerable knowledge about the business they are acquiring – staff, customers, suppliers, operations etc. This should facilitate a smoother transaction and subsequent handover than alternate sales. This also gives the Vendor the comfort that their business, which even at exit they are likely to retain an emotional attachment with, is being led by competent management. The likelihood is this presents the best basis for business “continuing as normal”.” (Borzomato, 2014)
Some of the problems inherent in an MBO deal can be reduced or even eliminated through a Buy-In / Management Buy-Out (BIMBO) type of deal.
In these deals the existing management team is joined by one or more external individuals. Typically, these are experienced senior managers who are seeking the leadership role that was not available to them in their previous employment.
These problems still remain:
- A BIMBO team is unlikely to be able to match the value offered by a trade buyer as they will not achieve any savings by combining businesses.
- The vendor will have to accept payment over a longer period of time, so that it is not a clean break from the business which is now run by someone else – even though they are still using your money!
- The buy-in members of the team are strangers – not only to you, the vendor, but also to the other members of the team. BIMBO deals have a good track record of success, but often members of the team fall by the wayside as the new leadership becomes established.
- BIMBO’s are often backed by financial institutions (Venture Capital) who set demanding performance targets and are quick to act if these are not met…….