These techniques reduce but do not eliminaterisk. For that reason, owners typicallyundertake this type of sale only if no alternativeexists, if they don’t need the money, or if theyhave complete confidence in their employeesand in the economy to support the company’sprosperity. The most common reason,however, for exiting using the long terminstallment sale is that the owner has failed tocreate a less risky exit plan.
LEVERAGED MANAGEMENT BUYOUT
This transaction structure draws upon thecompany’s management resources, outsideequity or seller equity, and significant debtfinancing. This structure can be an ideal way toreward your key employees, position thecompany for growth, and minimize or eliminateyour ongoing financial risk.To effectively execute a leveragedmanagement buyout, your business shouldpossess the following characteristics.A management team that is capable of operating and growing the businesswithout your involvement.Stable and predictable cash flow.Good prospects for future prosperity andgrowth. The growth of the companyshould be described in detail in amanagement-prepared business plan.A solid tangible asset base, such asaccounts receivable, inventory,machinery and equipment. Hard assetsmake it easier to finance the acquisitionthrough the use of debt, but servicecompanies without significanttangible assets can obtain debtfinancing, albeit at higher cost.Have a fair market value of at least $5million (probably $10 million in order toattract the interest of private equityinvestors).The prerequisite for a management-ledleveraged buyout is that you, as the seller, andthe management team agree on a fair value for the company. The parties then execute a letter of intent giving management the exclusive rightto buy the company at the agreed price for aspecified period of time (typically 90 to 120days). The management team and its advisorssubsequently arrange the senior bank debt tofund a portion of the transaction. This bankdebt usually requires management to arrangeto make an equity investment prior to closing. Itis at this point that the management team andits advisors seek an equity investor. They offer the equity investor a complete package of price, terms, debt financing, and managementtalent.The equity investor need only weigh thereasonableness of the projected return on hisinvestment.There are many professionally managedprivate equity investment funds that activelyseek management leveraged buyouts as apreferred investment. These private equityfunds control billions of dollars of capital for investment which they may structure as senior debt, subordinated debt, equity or somecombination thereof. This investment flexibilityenables the private equity investmentfirms to be much more nimble than your
Joseph Associates International, Inc. www.BrokerChicago.com