I have talked about leveraged buyouts now I am going to talk about management buyouts. The Management Buyout (or MBO) is simply an LBO that includes management as part of the buying group.Thus instead of just you buying a small business it is you plus one or more members of management of the target company. This technique is used widely throughout the private equity sector in big deals especially.
So why is an MBO important to the Small Business Buyer? There are several major advantages to an MBO.
1. Ownership ensures that management will remain with the company. If you like how the company has been managed then you will want to make sure it continues.
2. The management is a source of capital. If you are lacking capital (and let’s face it we always are) in a deal the management group can often supply it.
3. It adds credibility in dealing with the seller. If the seller has several buyers he will always favor the buyer that includes the management group.
4. It makes the deal bankable. Banks always want to see good management stay on. It just about locks up the financing.
So how do you use this technique on the smallest of small deals. Well the deal cannot be so small that it does not have any management. So once again we are back to a minimum size where the deal has more than just the owner running the company. This usually means there is a general manager. This can be a sales size of upwards of $3.0 Million, sometimes less sometimes more.
It is a small task to sell secondary management on becoming full fledged owners of their own company. If the GM is fully aware of the sale an approach can be made even with the owner’s full knowledge and support. It is not always my first choice to partner up with the managers because I like to keep my buying group small and insulated from the outside world. However, I have used this strategy in the past with huge success to complete deals which I would not otherwise have had a shot at. Consider bringing in management as your partner when wrestling with a tough but attractive deal.
