Keys to Successful Management Buyouts

Posted on: June 7th, 2024

keys-to-successful-management-buyouts

Management buyouts capture the imagination of senior level managers both for the upside and the opportunity to control one’s own fate. They are particularly attractive to entrepreneurial managers who see the current ownership as having a cautious view toward large scale strategic growth. Management buyouts, by putting ownership in the hands of senior managers, create a powerful alignment of interest between owners and operators. The act of vesting of ownership in employees’ hands does not automatically translate into a successful deal. There are several important differences between management buyouts that work and those that sputter. Management buyouts prosper when the senior managers have a mature, long-term plan for the business. The new owners need to think in a more long-term visionary way and less in a day-to-day way. This transition to an ownership perspective is not easy for all employees and often involves the need for continuing education or the adding new talent to the team. The new owners also must have a clear and workable governance structure and clear responsibilities for those empowered. Just because many employees own stock does not mean that you can manage the company according to the will of all the shareholders. Management buyouts also require that the new owners elevate relationship building and financial reporting to ensure a strong connection with their lender.

Successful management buyouts focus on having adequate growth capital and working capital financing in place to power their scale up. New owners that ensure they have the financial means to invest in and navigate the post-closing growth plan are usually on the winning side. Finally, smart management buyout owners understand the need for best-in-class operational reporting systems and dashboards. Investing in these systems ensures the company has strong visibility into its operating fundamentals as well as the ability to measure and drive efficiency. These are critical for both driving growth and impressing a future buyer when the time comes to exit.

Acquisition financing loans are specialized loan structures with a decision process that involves multiple variables. As acquisition financing lenders have grown over the years, many have adopted a volume, asset under management approach.

In the deal world, there are two types of acquisition financing transactions – those that limp to the closing line and those that sprint full speed through the tape. While the diligence process will slow all companies down and inflict a bit of fatigue, strong performing companies show resiliency and rebuild momentum heading into their acquisition financing closing.

Acquisition financing functions as a growth elixir for ambitious, fast-growing companies. It enables growth at fundamental levels of a business thereby creating a compounded scale-up effect. This approach allows companies to have superior capital bandwidth which is a competitive advantage in their industries. Through acquisition financing, companies add more enterprise size and diversification in one large growth step which reduces risk and increases value.