Many small businesses, up to 20 employees, are run in a very hands-on manner by their owners. This can work well for everyone and hopefully provide the proprietors with a good level of income.
But what about when the business owner wants to sell?
When it comes to the moment they want to move on, or retire, however, their future financial independence will depend on how much the business is worth.
If the business is dependent on them, it will have limited value, but if it functions as a fully autonomous company, it will command a significantly higher value.
So can a management buyout be a good way to sell your business?
When it comes to exiting a business, the outright sale of a company is relatively clean and tidy. The owners get paid and may have to stay for a transition period, but then all is complete.
On the other hand a sale provides little guarantee for the future of the employees – those who have worked so hard to make it thrive.
Management Buyouts, or MBOs, are a great way of selling a business and simultaneously rewarding those who have worked hard to make it successful. They are also a good exit route for business owners who operate in highly niche sectors where there may not be many buyers.
Preparation for an MBO
For an MBO to work clients need to have confidence their needs will be met under the new regime and the business needs to able to function smoothly without the founder of the business at the helm.
There has to be at least one experienced and capable manager who wants to step up to the role of CEO and the business needs to have sufficient financial resources to sustain a period of transition and pay the necessary legal fees. Based on my own experience annual turnover should be a minimum of £1million and the net profit +17%.
The theory of an MBO is straightforward; the owner transfers shares and receives an initial payment in the form of cash on completion, fixed payments over time and variable payments subject to the future performance of the business.
The new owners agree to operate within certain budgetary restraints and provide ongoing management information to the former owners. Should payments not be met legal contracts are put in place to enable ownership of the business to revert back to the previous owners.
Such is the theory. In practice, there are huge emotional hurdles to be overcome. The stakes are high, well established relationships need to transition; self-limiting beliefs can be triggered and if not dealt with disaster can ensue.
Letting go of a business prompts fear
When faced with the actuality of ‘letting go’ of the business the exiting owner can feel threatened. Such fears are not logical. In our rational mind we know it’s time to move on but the absolute finality of no longer having a life full of activity and being the ‘at the centre of everything’ can cause the exiting owner to panic internally.
Questions arise such as, ‘Who am I now?’ and ‘What is my worth?’ It is at this moment that the ego may suddenly find fault with what is being negotiated or even invent excuses for backing out of the deal altogether.
Suggestion: If retiring have clear defined projects to progress to once the MBO is complete.
The importance of trust
Trust is a measure of our ability to live with uncertainty, and faith that all will turn out for the best even when things look difficult.
When we trust others, we reassure and inspire them, and they lift their game as a result. The more we are willing to trust, the greater the gift we give and the more we are likely to receive in return.
Trust is pushed to its limits when previous owners witness a new management team doing things differently, especially if their strategies fail to work immediately.
In such cases the new management will respond best if they are allowed to sort out their own messes. The former owners can indicate they are available to help, but that is all. They must resist judgement and condemnation.
Criticising others is a subtle form of attack, and it causes those on the receiving end to close down or counterattack. Also, fretting and worrying tends to attract the exact negative outcome it is most in fear of.
Suggestion: Surrender the situation – not in the sense of giving in, but in the sense of giving it up to the Universe; in the faith that all will come good.
Lawyers incite suspicion
Solicitors are an unfortunate necessity when drafting an MBO; it is important to have sufficient checks and balances in place if things do not work out.
Such controls need to be established from a place of openness, mutual understanding, and compassion but unfortunately many lawyers unnerve everyone with their endless, ‘what if’ questions. They present both parties with disaster scenarios that are unlikely to happen, but once voiced, arouse uncertainty and suspicion.
Suggestion: Agree as much of the deal in advance as possible.
Give new management time
The first couple of years after the deal are the most challenging. It takes time to transition from being a competent manager to becoming an adroit CEO. The skill sets are different.
Managers can be excellent administrators, efficient at installing and adhering to systems and good at detail; but may initially be risk averse, miss the big picture and lack gravitas in the eyes of clients and staff. They do not automatically have the intuitive wisdom and trust in themselves to handle entirely new situations.
Suggestion: Give new management sufficient time to find their feet and ensure the new CEO has an appropriate mentor, someone who can allay limiting beliefs.
All MBOs are based on future performance forecasts and as such are best guesses. It is important to stay in touch with our intuition. It enables us to see behind statistics and make useful decisions in spite of incomplete information.
Our intuition is an inner voice that we all possess and an astute counsellor. It comes with an uplifting feeling, unlocks creativity and brings about win-win solutions. It frequently defies logic, at least initially, but is complementary to it.
When we consciously decide to acknowledge our intuition, it willingly and increasingly communicates to us; by allowing it space and giving it focus, we strengthen it. We nurture our intuition by regularly absorbing ourselves in activities that take us completely away from our routine thinking, out of our heads, and into our bodies.
For me, this is through meditation and walking in open countryside. For others, it might be running, horse riding, or dancing to music. The main criterion is that it be pleasurable and regular; it is too easy to get busy and make excuses. It is when we get back to our true selves and feel relaxed and centred that we allow space for our intuition to come through.
This guide has been written for ByteStart by John Reynard. John founded a market research company which became one of the fastest growing and most profitable in its sector in Europe. He successfully sold the business via an MBO and is now a marketing / business coach, and author of ‘The Spiritual Route to Entrepreneurial Success – From Harassed Sole Trader to Visionary CEO’. Find out more at SpiritedEntrepreneur.org.
Last updated - 2nd August, 2017