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Who are the potential buyers for my business? Part 4

- John Mickelson, managing partner Midwest Growth Partners, is IowaBiz's blogger on succession planning. Read more about him here. 

Over the last few columns, we have learned about the pros and cons of family buyers, financial buyers, and strategic buyers.

The next type of buyer may be the closest to you day-to-day – your employees. Structurally this can be accomplished with or without an ESOP, which is a vehicle that is intricate enough to warrant an entire future post. So for today we will focus on a traditional employee purchase, sometimes known as a “management buyout” (MBO).

In an MBO, a group of employees that you get to select, pool their financial resources and purchase the business from you. Because you can select the buyers, you have more control on your business legacy post-close than with other buyers.

Oftentimes the employee-purchasers take partial or full operational control shortly after the transaction because they have already worked in the business, so a lengthy transition period is not needed as with other types of “outsider” buyers.

Because the typical employee does not have the financial wherewithal to purchase a business, an MBO purchase price is usually some combination of buyer cash, debt, and seller financing. Also because the transaction is taking place between two known and friendly parties, many times the purchase may happen over a period of time rather than immediately at once.

As a result, a negative for the seller in an MBO is that they may not truly “exit” at close – they still have significant financial risk in the business – one in which they are likely no longer operating full time.

A solution may be to access an additional source of funding for the transaction to fill the value gap. For instance, if there is a business worth $10 million, the employee-purchasers may be able to come up with $1 million between them, borrow another $3 million, and get the seller to agree to finance $2 million. This leaves $4 million unaccounted for.

The $4 million value gap is a perfect spot for a financial buyer (private equity firm). Financial buyers love backing a hungry management buyout team that is seeking to purchase and grow a business they know well.

This solves the problem for both sides – the seller immediately de-risks by getting most or all of their money out of the business at close, and the employee-purchasers have the capital necessary to effectuate the transaction.


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