How to arrange a management buyout

There are many pathways to establishing a start-up business. Of course, the most common way of starting a new business is building it from the ground up. This means taking charge of every step in the process of establishing a new business.

But there are also other avenues available to the entrepreneur or businessman who wants to start a new business. One of these is a management buyout.

A management buyout may happen if you, as a management level employee in a division of a company, decide to buy the said division. This will of course only happen if the management is a willing seller of that division. The benefit of a management buyout is that you get to control an almost complete business in a field where you are already an expert. The risk is that if you don’t handle the negotiations of a buyout with tact and a little caution, instead of getting a new business, you may end up not having a job at all.

How do you go about making a management buyout?

As was mentioned previously, the first step is to find out if the management or owner is willing to sell. This is quite a delicate operation. You must first determine how the owner feels and take every step with care.

There are some factors though that may work in your favor. Owners who are considering selling a part of their company will find it more advantageous to sell to a management team they have employed because it ensures confidentiality continuity and speed. Confidentiality is quite important because a business who opens itself up to the sales process is open to scrutiny from everyone – even those who are not even interested in buying. This means the competition can see the books and go home with vital information that can be used to benefit the competitor. Continuity is also important since business founders would want to see the continuation of what they’ve been doing especially if it is something that they have painstakingly built over time. Speed is also an advantage because a management in situ means the parent company will not have to go through a long and arduous auction process.

But before making any further long-term plans find out first if the management buyout is viable for your long-term benefit.

First of all determine if you have a quality management team in place. Make sure that the key positions are covered by competent people who are either already in place or scheduled to come in. Also look at the second-tier management. For venture capitalists the succession plan is just as important as the senior management portfolio.

Next, determine if the division can post quality earnings. A division that only has one big ticket contract that is up for renewal in a few months is not an attractive buy.

You should also formulate exit options for any potential investor. This is because their primary concern would be how to realise the money that they have invested. Try to draw up a list of companies that might want to buy your company in a few years’ time.

Lastly, talk to a corporate finance adviser to discuss the feasibility of your idea. A go-ahead from a competent corporate finance adviser means that your idea is possible and this will be your signal to pursue the management buy-out.