STRUCTURING A MANAGEMENT BUYOUT (MBO)
Senior executives have the ability to own significant equity stakes in the companies they run whether at privately held companies or divisions of public companies. Such executives are able to acquire (or “buy out”) the ownership interests of the corporate parent, owner/CEO or other shareholders as a result of a corporate sale or divestiture. This type of transaction allows senior managers to run and grow their business as direct equity holders, sharing in the rewards of the incremental future value they create. Through some creative transaction structuring techniques, senior management can acquire a company with a very small upfront equity investment.
One of the perceived challenges of a management buyout is funding the transaction. Most management teams, on their own, do not have the available resources to acquire a company or division from its owner. Likewise, most parent corporations or owners are not willing or able to accept consideration less than fair market value. However, there are ways to creatively structure a transaction that not only satisfies the owner’s valuation expectations, but also accommodates meaningful and potentially lucrative equity ownership opportunities. Additional structuring techniques can be employed to minimize the burden of raising outside capital to fund the deal.
Senior management team members should actively position themselves as potential acquirors for the businesses they run by having ongoing dialogue with company owners or the parent corporation. Because of their tenure at the company or division, management may receive favored treatment either (i) before a formal decision has been made to divest or sell, or (ii) as part of a formal process.
Given the complexities, risks and timetable associated with a management buyout, working with an advisor that has buyout experience and strong relationships with capital providers is critical to maximizing probability of success. Care must be taken to structure the transaction, as well as build a sophisticated acquisition model and determine the optimal capital structure, among many other factors.
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Opus Advisory Partners actively works with senior management teams in all aspects of the management buyout process. In addition, Opus can co-invest alongside senior management in the transaction and position the management team to rapidly generate incremental value.