If you ain’t the Big Cheese, it’s likely you think (at least occasionally) that you could run the company better. So get a team together and make it happen! Here are eights steps to buying out your boss and seizing the reins.
1. Establish the desire
All parties to the transaction must have the desire to see the business change hands. If you are currently the MD, General Manager or floor supervisor, it’s not enough for you alone to want to buy the business. You have to create desire within both your intended shareholders and the current owner. Get your team together, get them committed, then approach the owner. Don’t talk price during this discussion as you will get bogged down in the details of the transaction prior to creating enough intent within the group.
2. Establish the full team
Know who you are dealing with. Are all members of your buyout team committed to seeing this through to the end? If they are sitting on the fence they need to make a decision to throw their weight behind the transaction. Everyone has to be aligned or it won’t work. You might need to bring in an outside investor to get the deal done and you have to know their intent (long-term hold or in and out for a profit).
3. Establish the price
Determine a fair price to be paid that is agreed to by all parties. Make sure all parties, both buyers and sellers, agree to how the price has been calculated. Check the methodology with outside advisors. There will often be a conflict. Particularly when buyers’ advisors want to pay less and sellers’ advisers want them to pay more. Get some outside help, but remember that they are advisors. You have to take their thoughts and opinions into consideration, but you still make your own decisions.
4. Establish the structure
Not all buyouts have to be cash up-front. For many larger transactions there are always elements of deferred amounts, performance hurdles, bonuses, shareholdings retained. Determine the structure that is right for the business. Remember this: if the structure of the buyout puts the business under undue pressure, you are creating difficulties from the start. If that is always held in mind, then you can keep it on track.
5. Determine finance available
This is sometimes interchangeable with Step 4. Until you find out how much you can afford to borrow, you might not be able to determine the structure. Remember that banks will finance assets such as debtors and equipment, but few will finance goodwill. Aim for no more than 30 percent of your total loans with banks to be unsecured (i.e. financed against profit versus an asset).
6. SIGN the shareholders agreement
Establish the rules now with respect to duties of each of the owners, both as ‘working owners’ and as shareholders. What are the penalties for non-compliance? What will you do if someone wants to leave, or you and other shareholders want someone to leave the business? What happens if someone dies?
7. The purchase as a project
When all parties know each other well, the transaction can get bogged down because not everyone pulls their weight. Establish a timeline for completion and get agreement from everyone now. If you cannot work together on something that will build your wealth, what will happen if times get tough?
8. Don’t buy everyone a Mercedes yet
If the business was making good profits before you owned it, retain them and reinvest in the business or pay down debt as quickly as possible. Ideally you are increasing your own wealth through the sharing of profits, but remember that one day you might like to sell as well and leveraging the company into further debt now because of personal expenditure will only hurt the company.
‘A Stake In The Outcome‘ by Jack Stack (2002)
Todd O’Neill is Managing Director of The Mardent Group, an Australian finance broking company that specialises in helping people buy businesses. Previously he worked for one of Australia’s big four banks and in the UK and Europe for high profile firms Accenture and The Industrial Bank of Japan.
Illustration: Frits Ahlefeldt