Posted on: July 1st, 2021
Management buyout are the ultimate transaction structure where management insiders purchase the company from the owner. This transaction structure creates symmetry of alignment with ownership and management being one and the same. This reduces transition risks such as loss of key employees and post-closing employee resistance to the acquisition.
Management buyouts create tremendous opportunity for post-closing growth. Frequently growth rates of privately held companies flatten as owners get older and companies become more mature. All companies go through a lifecycle growth pattern, and it is challenging to maintain strong growth over the long term. They do so only through reinvesting heavily and pursuing a commitment to continual innovation.
Eventually, as this reality sets in, ownership usually opts to grow more slowly, and take more cash out of the business. With a single owner of a business, as the business grows, its value can represent a very large portion of the owner’s personal net worth. At some point in time, owners see the value of the business as something to be defended, and begin to play it safe, to not jeopardize this nest egg. As this shift from building value to maintaining value takes hold, the management team may still see many strong ways to grow the business. These new growth paths often do not get prioritized in board room despite their low risk, high return profile.
Management Buyouts Approach
Ownership may opt to play small ball with new growth opportunities, at a time where there is major scale-up growth is readily available. Eventually, management gets frustrated with the stay the course approach. When management buyouts occur, management is now able to employ a more expansive and transformational approach. They seek to grow the company in a more aggressive way over the long term through implementing their own growth gameplan. Whether it is more digitalization, new products, or new ways to sell, the new ownership team is now free to invest where they see fit.
Moreover, the new owners need to achieve higher growth to justify their management buyout purchase price and generate acceptable returns as an investor. Growing at the historical rate may be enough to deleverage the company, but faster growth will ensure a superior return on their equity investment in the management buyout.