Potential MBO deal
September 28, 2021
by a searcher from Cornell University in Vancouver, BC, Canada
Connected with the broker representing an owner that got my outreach email. Seller in his 60s looking to retire. Already promised his right-hand person the president role, but the future operator doesn't have the money or appetite to take over. Seller not interested in seller note or earnout (according to the broker).
GM = 50+%. High operating leverage suggests the presence of elevator assets, which is likely why seller is trying to retain talent with his promise.
Could be an interesting situation for management buy-out. Strategic buyers are probably turned off by the future operating arrangement. LMM PE might be interested but structuring this deal requires creativity. And now, add a self-funded searcher to the mix.
Where does a searcher fit in this MBO scenario? How to align interests with seller and future operator? What are some of the creative ways to structure this deal?
Thank you for your thoughts!
from New York University in New York, NY, USA
That said, this also sounds like it could be interesting for certain types of strategic buyers and PE firms. Some strategics I know just like to plug in acquisitions as new divisions and not fully integrate them - this sounds like a fit for that type of strategic. And if the future operator is up to the task, this seems like a good opportunity for a PE firm.
If the owner does indeed have a close relationship with the future CEO and genuinely wants to see him/her succeed in the future, you might be able to position yourself as the right partner going forward. There clearly would be dialogue with the current owner at some point, and if the #2 is being positioned as future CEO then that person would also be heavily involved in the process. Outside of competing on price, what can you bring to the business going forward and how would you support the future CEO? How would you differentiate yourself from other searchers as well as from strategics and PE firms? Depending upon the relationship between the owner and future CEO, you could have an advantage here.
I’m a bit surprised by the lack of interest in keeping a bit of skin in the game going forward. In theory, HIS person will be running the business going forward - seems like the perfect situation for an earnout, unless he doesn’t have full faith in the future CEO. Or possibly the broker has steered him in this direction. Has the broker given you feedback on why the owner is taking this position? Would the lack of seller financing or earnout be a non-starter for you? You could always just propose the structure that makes the most sense for you but tell them you are flexible to alternatives, and see if you can get the conversation started. I definitely agree with Aaron’s point that you need to gauge the motivations of the seller and - if this business is a great fit - best position your financial and non-financial proposal to meet his needs.
I look forward to hearing how this works out - please keep us posted and good luck!
from The University of Chicago in Chicago, IL, USA
Feel free to DM me.
An attorney does not know all laws, a CPA does not know all accounting aspects, a tax expert does not know al tax tricks, and a doctor does not all fields of medicine, "Business brokering" is an order of magnitude (may be even more) less scientific than these professions. It further involves a lot psychology and emotions. It is a lot of on-the-job-learning. For one to expect a business broker to know everything is unfair..