Is the time right for a management buyout?
.. management buyout?
May 8, 2008 By Mark Borkowski*
In the film ‘Dead Poets’ Society’, Robin Williams plays a gifted and
dedicated teacher determined to help his students appreciate the
age-old adage Carpe Diem or, seize the day.
In the film ‘Dead Poets’ Society’, Robin Williams plays a gifted and dedicated teacher determined to help his students appreciate the age-old adage Carpe Diem or, seize the day. This phrase captures a major theme in the film and in life: make the most of your existence and don’t let opportunities pass you by. Keeping this advice in mind, many ambitious business managers have decided to seize the day by making the transition from employee to employer.
For several of these individuals, the best way to do this is to initiate a management led buyout or a take over of the companies they work for. This is also a viable alternative for principal owners who do not see an easy exist or possibility for liquidity. Allowing a management buyout to take place to solve this issue.
Being an entrepreneur is not for the faint of heart. Amongst a group of 10 young managers or professionals,
statistics tell us that only one has what it takes to be a business owner.
What separates entrepreneurs from dreamers is their ability as individuals to invest somewhere in the vicinity of $250,000 into the companies they hope to own. This number can be as high as $1 million in some of the larger deals. If you want to own something, you have to put your money and likely your job at risk. If you are unable to put your money on the table, stop dreaming.
A substantial financial investment is critical for a serious management buyout because outside investors, institutional or private, need to know you are committed. Investors who will personally support a management team or make a company investment are almost always required and strongly recommended. Institutional investors request private investors that have some management background or special knowledge in the industry to co-invest with them. Institutions refer to these investors as the ‘smart money’. If something goes wrong or an important decision needs to be considered, the institutional investor wants to have some other intelligent investors as part of the deal to help them work the issues out.
To ensure the success of a leveraged acquisition, it is extremely important to establish an appropriate capital structure. You will need to understand and present your written business plan detailing seasonality, cash flow cycles, capital expenditure requirements and other such factors.
Some preferences presented by lenders when financing a buyout include: companies that are not highly cyclical and have steady, predictable cash flows; companies with low capital expenditure requirements and high, free cash flow; growth businesses, especially in high valued-added manufacturing and mining; and companies with strong, committed management teams and well communicated, compelling business plans. Meeting these requirements can be a challenge for company employees, managers or executives.
For those unaware, management buyout opportunities present themselves often and for a number of different reasons. The first and most common reason is that a company or division no longer fits within the strategic aims of the parent group or owner. Another reason may be that the parent group or owner simply requires liquidity or cash. Or, profit levels may not be considered acceptable, or the company is showing a loss.
Other reasons include a private owner who wants to sell his business and not bother with the complicated process of selling to an outside buyer. Usually this seller has a very good relationship with the management team and has confidence in its ability to manage the business. This type of owner usually retains some equity ownership or assists in financing the business with vendor take-back notes.
Management led buyouts are generally regarded with great favour as they provide corporations with a convenient alternative to the acquisition of their company by an outside suitor, while at the same time allowing them to avoid the conflicts that often arise between management and outside buyers.
The entrepreneurial spirit is alive and thriving in Canada’s glass industry. Before beginning, however, it is extremely important that management agree they have an arrangement amongst themselves (infighting is a major reason deals fall apart) and that they enlist a professional and experienced intermediary. This professional will help package the opportunity, set up the process, structure the buyout deal, and negotiate with financiers and ultimately the owners. There are also legal, accounting, tax and other levels of expertise that need to be integrated into the deal.
Maybe it is a fluke in the business cycle, but never in the history of time has there been more diverse, abundant and less expensive investment capital available chasing too few deals. There is no excuse for talented management teams not to take hold of their futures and at least attempt to do a management buyout. Seize the day; use the opportunity of the present moment to pursue your vision. -end-
*Mark Borkowski is the president of Toronto based Mercantile Mergers & Acquisitions Corporation, a brokerage firm specializing in the sale of mid-market businesses in the Canadian glass industry. He can be contacted at firstname.lastname@example.org or (416) 368-8466.
A complete package
Without question, many glass orientated companies in Canada have been subject to significant
consolidation and a rash of mergers and acquisitions. If a decision to sell has been made, whether the company is part of a large public company or a privately owned entity, it is important that the selling principals or executives realize the full value of the business.
In order to do this, owners and senior executives must properly prepare the company for sale; gathering together all of a company’s detailed business records, technical data and history for potential suitors. This information is only provided to those who have signed iron clad confidentiality agreements.
Here are some guidelines on how to organize this vital information.
The most important documentation to have readily available and organized for review is
a company’s financial statements. It is best to have at least four or five years of complete financial statements ready. The next important step in the information process is to provide a sales history for the company.
A current listing of inventory and accounts payable and accounts receivable ageing schedules are a must. Also valuable is the owners or key executives compensation, listing not only the owner’s salary(s) but also their bonus, pension, life insurance, car, perks and all other company paid personal benefits. This information is crucial in determining what the company’s actual ‘cash flow’ is, as it significantly influences the purchase price.
General valuations that determine sale prices for most Canadian glass companies are based on a multiple of
normalized ‘Earnings Before Interest, Taxes, Depreciation and Amortization’. This is referred to as EBITDA.
A set of pro-forma sales and profit projects looking down the road at least on year is essential. Buyers need to understand where their payback is coming from. Any companies with substantial physical assets should have full appraisals done on these assets before moving into this process.
Your acquisition prospectus or information memorandum should contain a ‘mission statement’ that, in a few words, encapsulates the purpose and direction of the company. Your presentation must include a brief but thorough business history on the companies and markets you have served. One very sensitive matter is to guard your company’s customers. Until a serious intention has been expressed, this information should be guarded.
Licenses, leases and contracts
Part of what makes a typical company worth pursuing is the important contracts and obligations. These should be easily available, including leases, notes, liens, loans, agreements, contracts, licenses, employment agreements and other important contracts.
You will need to provide a prospective buyer with short (no name) resumes on your key managers. A complete management chart annotated with salaries and job titles is important. There is no benefit to sellers to hold back information and make the buyers pull it out piece by piece. The best negotiations are quick and smooth. A prospective seller can only negotiate the purchase price when they have provided the prospective suitors with information to fully evaluate the company. -end-
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