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Leveraged Buyout Financing for Small Businesses

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❶Most of the time, the management team takes full control and ownership, using their expertise to grow the business.

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How to Acquire a Company Using a Leverage Buyout
Employee Stock Option Plan

Many financing entities prefer to fund management buyouts of stable, growing companies because the risk of default is typically less. In a management buyout, also referred to as an MBO, the ownership of the company changes, but the management team that led the company remains and becomes fully vested as owners. Small-business owners with loyal employees who have expressed an interest in owning the company can engineer a buyout of their ownership stake in the company through the creation and funding of an employee stock option plan, or ESOP.

The owner establishes an ESOP and contributes all of his shares to the plan. The company then contributes the cash to buy the stock or, more often, enters into a loan agreement to borrow the funds to buy the stock. The company repays the borrowed funds. The owner gets the cash and the company owns the shares until the shares are granted to employees. If a business has multiple owners, one way for one owner to buy out the other or for a group of owners to buy out a partner who wants to leave is through a recapitalization.

A recapitalization, also known as a recap for short, replaces equity with debt, changing the company's capital structure. This gives the process its name. A company must have steady operational cash flows and, in some cases, high-quality assets, to qualify for a recap. The company will use those cash flows to pay down the debt it takes on. A recap is also a type of leveraged buyout.

The IPO process can be time-consuming and expensive. More companies can successfully go public and attract interested buyers through the use of private investment in public equities, or PIPEs. That banker often uses a reverse merger -- where a private company merges into an existing, but non-operating public company -- to go public.

The banker interests primarily hedge funds in investing in the company. The best candidate for a Management Buyout is a business or business unit that can assume debt and is stagnating because management is being prevented from unlocking upside revenue opportunities by the current owners.

In order to unlock the revenue potential, the MBO plan often calls for increased investment in product development, new equipment, staff training, marketing, and in the case of "carve outs" of non-strategic assets, a new accounting system. The management must operate as a team that can adapt to the new environment and unlock the upside revenue and accomplish other key objectives. If there are fault lines within management, they will be exposed. The sooner these issues are dealt with candidly and honestly, the greater the are chances of success of the Management Buyout.

The Management Buyout process is seldom straight forward or smooth. Negotiations often get derailed. Provided that the management team is well advised, it is usually possible to ensure that management is not exposed, or "left holding the baby," if the deal fails to complete. Some of the surprises that arise during a Management Buyout that threaten to derail the process include:. An experienced advisor will have seen most of these issues before and will take steps to address them early in the process so as to minimize their risk to the deal.

You may now be faced with difficult decisions that need to be made in order to successfully grow your business. And these decisions are made even more difficult if they involve managers who have participated in the MBO. Sometimes downsizing is required. And as owners, you and your team may be keen to start seeing a return on your invested capital. You need to go into an MBO with your eyes open — most of your financial partners expect to be paid out before you see any money and while most bankers will consider allowing dividends at year end, its best to assume that they will say no.

A good rule of thumb is that you should consider that your money is locked in for at least 5 years, assuming that you remain with the company. Provisions obviously need to be made to allow you to get your money out should you land up leaving the company. Advisors and financial backers can help make or break a deal. A Management Buyout advisor, like the golf pro, can help with selecting the right financial backers to get the MBO done while management can focus on running the business.

There is no shortage of accountants, legal firms, bankers, and private equity firms that have an appetite for a good deal. However, it is important for the management team to feel very comfortable with their advisors and backers, as it is a bumpy ride and the managers may not be able to grasp all the ramifications as the process unfolds!

Management Buyouts present significant opportunities for business owners, financial sponsors and entrepreneurial management. For the business owner it is often a chance to retire and unlock their wealth in the business.

For corporate parents, these transactions provide an opportunity to divest non-core operations and raise cash. From the perspective of management, Management Buyouts provide an opportunity to gain direct equity ownership of their business and create an entrepreneurial environment. And a Management Buyout is likely to be the best way that you and your team can build significant personal wealth.

A final thought… take time to enjoy the journey. When you look back it may be the most rewarding time of your business career. Within 8 months we completed two transactions and another one 4 months later. Ross Campbell ross theMBOgroup. Mike Bradley mike theMBOgroup. Some of the biggest mistakes we see during Management Buyouts include:

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Leveraged Buyout Financing for Small Businesses Most people consider leveraged buyouts to be solutions that can only be used to acquire larger businesses. However, nothing about a leveraged buyout is specific to larger business.

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She is a coauthor of Business Buyout Agreements: Plan Now for Retirement, Death, Divorce or Owner Disagreements, Save Your Small Business: 10 Crucial Strategies to Survive Hard Times or Close Down & Move On, Bankruptcy for Small Business Owners: How to File for Chapter 7, and Nolo's Online LLC. Over the last decade she has been .

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Employee Stock Option Plan. Small-business owners with loyal employees who have expressed an interest in owning the company can engineer a buyout of their ownership stake in the company through the creation and funding of an employee stock option plan, or ESOP. The owner establishes an ESOP and contributes all of his shares to the plan. Buy-Out Plan® is a dealmaking software system for “Main Street” business buyers and business brokers who want a step-by-step guide through the process of analyzing and valuing a small business like a pro.

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The buyer(s) will need to develop a strong business plan to prepare for the acquisition. The forecast should be credible and realistically attainable. Personal and business contacts and referrals can also help a successor secure confidence from bankers. A small buyout usually involves only one institution. Transferring Your Company to Key Employees White Paper Owners wishing to sell their businesses to management (key employees) face one management buyout, your business should • The initial purchase price will be paid in To establish a plan .