Business owners often overlook selling their company to their management team, with help from an outsourced CFO, as a possible exit strategy. But for solid companies with good cash flows, selling the company to management may yield a higher financial value for the owner, and a much brighter future for the business, management, and the seller. Business owners choose this exit strategy as in the right situations this type of sale can provide four key benefits:
1. Sale at a higher value than offered by third private equity firms.
2. Receive significant cash proceeds at the closing.
3. Sale to a group most qualified to successfully run the business – the management team.
4. Owners get to stay involved in the business.
Sell at a Higher Valuation
It may seem counter-intuitive, but selling a company to the management team can often be done at a higher valuation simply because the seller (not the buyer) determines the price. The buyers (i.e. management) can be willing to pay a higher price, because they can obtain a much higher ownership interest (plus job security) than they would if the company were sold to another company or a private equity firm. While determining a company’s valuation and ‘right’ sales price can be ‘half art, half science’, many private companies below $100 million in value, often get valued around 5 times (X) EBITDA less company debt plus cash.
This valuation (5 X EBITDA less debt plus cash) is particularly common when the buyer is a private equity firm. For some owners this rule of thumb is helpful, while other owners want to test the market by approaching other possible strategic buyers and private equity firms. In fact, it’s not uncommon for owners to run a dual track of offering the company to management while considering outside buyers. This ‘dual shopping’ process can be an effective way to arrive at a fair price – that is where owner’s don’t leave money on the table and managers don’t grossly overpay. In many cases, management buyouts offer a unique opportunity for both buyer and seller to get the best possible deal.
Significant Cash at Closing
Probably the biggest reason owners don’t consider selling their company to management is that they don’t see their management as qualified buyers, because managers don’t have significant capital on hand to buy a business. However, when it comes to leveraged buyouts, it’s not the net worth of the buyer that matters as much as the net worth (or cash flows) of the company. In fact, when private equity firms buy companies, they rarely use all their own money. Instead, they borrow funds based on the underlying cash flows of the business they are buying. In some situations private equity firms are able to acquire a controlling interest in a company (50% or more) solely by borrowing from the bank or lending institution (and without committing any of their own capital).
Sell To Proven Managers
Even though private equity firms and new owners often make significant changes in the acquired business, good performing companies are often best left in the hands of the existing managers. In fact, companies occasionally experience dramatic growth after a buyout, because talented managers are given more incentives and control.
Owner Gets To Stay Involved
Owners sell businesses not only for financial gain but to get away from the stress of day-to-day operations. Unfortunately, soon after selling, some owners feel remorse or boredom because they don’t know what to do next or don’t feel needed by the new owners. Selling to management allows owners the opportunity to stay involved in the business and do only the things they want to do.
When owners believe it may be a good time to sale their company, they need to consider all viable options. A highly-skilled outsourced CFO can add a lot of value to this decision process. Harvest CFO Consulting provides highly-skilled outsourced CFOs to growth and middle market companies to provide the solid financial foundation for owners and management to make critical business decisions.
