Management Buyouts and Seller Commitment

Posted on: May 27th, 2021

management buyouts

All successful management buyout transactions require two basic elements – a motivated buyer and a motivated seller. Management buyouts are very different than private equity buyouts, as they tend to be at lower valuations with a larger percentage of the price paid in the form of a seller note.

Why opt for Management Buyouts

The reason that many owners opt for a management buyout is clear – they want to ensure the continuity of the culture and the sustainability of the business. Selling it to the people that worked hard to make the business successful for the owner ensures this goal. It is a virtuous act by an owner, especially at a price and structure lower than what the market will bear.

Most owners are rightly emotional about the business as it represents a life’s worth of work. They accurately see the current management team as faithful stewards to the values they have enshrined in the business. Despite the powerful reasons to sell to your management team, the lure of a bigger price and a better structure looms large for many sellers. As much as they like the story book ending of a management buyout, larger dollars available from the private equity crowd can cause them to reconsider.

When push comes to shove, the management buyout option can often fade away as the owner hears the pitch of the private equity buyers. This tendency of the buyer, to consider the management buy-out structure and later convert to a private equity driven sale, underscores the need for seller commitment. When you are negotiating to purchase your company from an owner, it is not enough that the seller likes the option of a management buyout.

They must be fully and unequivocally committed to doing a management buyout. They need to understand all the benefits of a management buyout as well as the disadvantages up front. Sellers that merely like the idea of a management buyout but are not 100% committed to it rarely end up selling to management.