Buy out your employer

Despite the tough conditions in today’s financial markets, there is always capital available for good business opportunities.  This article describes how you can utilise some of that capital to buy-out your employer. 

Buying the company you work in is not for the feint of heart.  It will need some courage.  But it is worthwhile.  The rewards for many who have done so are considerable.  The newspapers are full of stories each month about more and more millionaires who owe their status to a successful management buy-out (MBO) or management buy-in (MBI).  

Of course there are pitfalls.  For every MBO that is successful there are a number which don’t quite make it.  In some the management still exit at a small profit, but in a few the management lose their investment as well.  So be warned, taking out your employer and taking over the company you are working for is not without risk.

There are some initial thoughts you need to consider first. 

The most important is to ask yourself can you handle the risk of failure?  What impact would it have on you, your family and the risk exposures of colleagues and their families.  An MBO/MBI is unlikely to work if you don’t have the support of your family.

If the risk of failure is acceptable then it is important to assess whether or not the MBO/MBI will work.  An early assessment of the strength of the business’s cash flows is essential.  Because an MBO/MBI requires debt finance, it is essential to have a strong positive cash flow.

The final stage of your initial assessment should be to assess how you will “exit”.  The purpose of an MBO/MBI is not to become the “boss” for the next twenty years.  The MBO/MBI objective is to build up the company and sell it on with a profit earned by yourself, your colleagues and the investors who backed you.

So now you have assessed whether or not it is feasible, where next?  Well the first thing to do is to begin to “test the water” with your employer or parent company.  In many cases people ask not only for their parent company’s permission to investigate and prepare an offer but sometimes for financial support. 

If the employer or parent company is onside then the next part is to prepare a business plan.  Usually, inside information sources need to be supplemented with outside information and advice.

At this stage it makes sense to appoint a financial adviser in order to ensure that a viable business plan is prepared that will attract investors.  A badly put together business plan can be fatal and kill the MBO/MBI idea right at the beginning.  The presentational skills of the MBO/MBI team are critical.  In the case of larger deals it is not uncommon for the management team to receive coaching lessons in public speaking.

The financial structure of the transaction and the ratio of equity, mezzanine and debt finance are quite complex issues.  These financial arrangements will need to be carefully negotiated and it is essential that the MBO/MBI team have their own financial adviser.

The financial adviser co-ordinates responses to the business plan from prospective investors.  If the responses are positive, then the financial adviser confirms that position to the seller, usually following up with a detailed proposal. 

If the seller of the business agrees to the proposal, the next stage is for a lead venture capital house to be appointed.  The lending Bank is then brought in.  A timetable of the work to be done is drawn up and due diligence commences. This stage is quite time consuming.  It often involves an independent firm of accountants and lawyers as well. 

By this time the costs are starting to go up considerably.  It is important that there are proper agreements in writing covering all costs and who is responsible for paying them.  You need to avoid being personally responsible for all the costs.

Assuming the proposal passes due diligence, the lawyers will draw up a sale and purchase agreement, new constitution, a shareholders’ agreement, directors’ service contracts and all the legal documentation to secure the finance.  The financial documentation can run to many pages as it can involve private equity (venture capital), mezzanine finance and bank loans.  The lawyers work can be delayed by mislaid documents of title, so it is important to press for documents such as title deeds at an early stage.

Well if you make it this far the chances are you are about to celebrate at the “deal” completion meeting when all the documents are signed. 

Do celebrate the fact that you now have a degree of control over your business life. But don’t think that’s the end of the difficulties and problems – they are only just beginning!


It is a myth that the “deal” completion meeting for an MBO/MBI takes place when you take control.  How wrong some people are!  The “deal” completion or “taking The “Change of control” meeting is the time when all the new responsibilities are taken on. 

Those responsibilities include meeting: the payroll, the demands of the investors, the banks and the normal trade creditor and customer demands. 

The “deal” completion meeting is actually the start of the really hard work.  You now have to run the business.

The meeting for celebration is usually at least two years away.  That is the “exit” completion meeting when the MBO/MBI is successful. 

Success at the exit meeting will be measured by the amount of profit achieved on exit/sale and by whether or not the private equity (venture capital) investors buy the champagne!

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