Management Buyout Reconsiderations

Posted on: May 23rd, 2022


Management teams can often feel unappreciated by ownership, despite being well compensated and respected. Management teams often see a management buyout as an answer to their state of frustration. With a management buyout, a group of senior managers band together and invest their own capital to acquire the company from ownership. The most successful management buyouts occur with companies that already have passive ownership, where senior management already functions in a quasi-owner like role.

While these transactions are extremely efficient at transferring ownership to insiders well positioned to build value, they are not without flashpoints during negotiation and execution. Throughout the negotiation phase, it is challenging for would-be buyers to get the owner to commit to a definitive deal structure. Invariably, owners have running conversations with their teams, and often say conflicting things.

One day, the owner may be willing to sell for a mere $10 million, whereas another day they may want $20 million. It is also awkward for a senior manager to engage in these discussions with the owner. Their relationship centers around day-to-day business activity, not the owner’s desire to sell. It is often emotionally charged for an owner to sell his or her life’s work and it can become a psychological minefield for a management buyer to traverse.

Sellers are notoriously fickle, so a management buyer assumes a certain level of risk even bringing up the subject. Assuming a management buyout deal gets closed, buyers quickly realize that owning a company is vastly different than running a company. Usually, a management buyout creates an ownership structure with many individuals as opposed to one individual, under previous ownership. The ownership group must align on one voice and one vision for the enterprise creating the need for shareholder vision reconciliation.

New ownership often feels like they have a new lease on life and wants to hit the accelerator hard. Owners must balance their zeal for growth with the need to pay down debt and invest in the business. Finally, new ownership must elevate their judgement to think in a long-term manner with respect to strategic investment and innovation. Senior managers may suddenly realize there is more to being an owner than exercising their management talents.