MBO - best way to table an unexpected offer
Discussion
Very first stage plan being formulated, just wondered if anyone has been through an MBO (either side)?
Our intention is to clear Q1 2015 and then slap a proposal on the desk of 2 directors and retire to a safe distance and enjoy fireworks.
Background to the business; 21 years old, niche tech company with fantastic employees but 1 director lazy and often absent when required in a financial control role and other approaching retirement age and also part time already whilst not having any need to attend (no function that a part time, living wage employee couldn't carry out). They built the business from nothing and are fiercely protective (the amount of times I cringe hearing the "how is our baby" comment when they've been absent for days...) whilst happy to call on a Monday and notifying us that they are on the way to the airport for a 3 week break.
Proposal consists of 50% share purchase, reducing their shares to 25% each, then a buy back of 5% of each of their shares per year for 5 years, thus keeping them incentivised in the business. This hopefully avoids them starting a new venture and competing as the 5 year buy back will be from profits generated, but keep them hands off to eradicate their failings as business owners that have hamstrung the business to the point of being unable to grow past the current state.
For the interested, numbers would be £750k initially and then £150k (£75k each) years 2-6.
Thanks in advance for replies.
Our intention is to clear Q1 2015 and then slap a proposal on the desk of 2 directors and retire to a safe distance and enjoy fireworks.
Background to the business; 21 years old, niche tech company with fantastic employees but 1 director lazy and often absent when required in a financial control role and other approaching retirement age and also part time already whilst not having any need to attend (no function that a part time, living wage employee couldn't carry out). They built the business from nothing and are fiercely protective (the amount of times I cringe hearing the "how is our baby" comment when they've been absent for days...) whilst happy to call on a Monday and notifying us that they are on the way to the airport for a 3 week break.
Proposal consists of 50% share purchase, reducing their shares to 25% each, then a buy back of 5% of each of their shares per year for 5 years, thus keeping them incentivised in the business. This hopefully avoids them starting a new venture and competing as the 5 year buy back will be from profits generated, but keep them hands off to eradicate their failings as business owners that have hamstrung the business to the point of being unable to grow past the current state.
For the interested, numbers would be £750k initially and then £150k (£75k each) years 2-6.
Thanks in advance for replies.
Existing customer base is huge, brand is very well established. The reason to buy is to remove the two barriers to growth - the current business owners.
Starting from scratch has been considered and scrapped as an idea, if for no reason other than we wouldn't deal with a supplier / service provider that quit their employer then approached us having only known about us because of their previous role. Morals shouldn't have a place in business decisions I know!
Starting from scratch has been considered and scrapped as an idea, if for no reason other than we wouldn't deal with a supplier / service provider that quit their employer then approached us having only known about us because of their previous role. Morals shouldn't have a place in business decisions I know!
2lefthands said:
Existing customer base is huge, brand is very well established. The reason to buy is to remove the two barriers to growth - the current business owners.
Starting from scratch has been considered and scrapped as an idea, if for no reason other than we wouldn't deal with a supplier / service provider that quit their employer then approached us having only known about us because of their previous role. Morals shouldn't have a place in business decisions I know!
I would imagine most customers wouldn't care less as long as they got to work with personnel they liked. £750k is a lot of buffer to find new business too. Starting from scratch has been considered and scrapped as an idea, if for no reason other than we wouldn't deal with a supplier / service provider that quit their employer then approached us having only known about us because of their previous role. Morals shouldn't have a place in business decisions I know!
On the other hand why would the directors want to sell? If they can milk the profit without doing much then why change things? If I was in their place I would discount the final payments of £150k as being worthless - after all if the business generates these profits and they stay as they are then they will get that money anyway.
I've never been on either side of the fence so the above may be worthless!
Only you can judge the political impact, but strikes me that you need this to be a friendly deal to work and you're already framing it as a, well not quite hostile but certainly very aggressive move.
Why does it need to be unexpected ? Are there other potential purchasers in the background ? Can you not have a civilised discussion around long term future planning and succession thoughts ? Most successful SME founders nearing retirement I have worked with are quite candid about their planning.
Specifically on your numbers, I agree with the comment above. Without them having stated a desire to exit fully, what's their incentive to sell you big equity rather than fire you and hire other managers and grant them some LTIP ?
Why does it need to be unexpected ? Are there other potential purchasers in the background ? Can you not have a civilised discussion around long term future planning and succession thoughts ? Most successful SME founders nearing retirement I have worked with are quite candid about their planning.
Specifically on your numbers, I agree with the comment above. Without them having stated a desire to exit fully, what's their incentive to sell you big equity rather than fire you and hire other managers and grant them some LTIP ?
2lefthands said:
Very first stage plan being formulated, just wondered if anyone has been through an MBO (either side)?
Our intention is to clear Q1 2015 and then slap a proposal on the desk of 2 directors and retire to a safe distance and enjoy fireworks.
Hmm, here's my thoughts:Our intention is to clear Q1 2015 and then slap a proposal on the desk of 2 directors and retire to a safe distance and enjoy fireworks.
What are the odds of them saying yes, as oppose to:
1) Thinking you are cheeky buggers.
2) Thinking that you have valued their 'baby' at a fraction of what it is worth.
3) Thinking that you have valued their 'baby' at half of what it is worth, and making you a counter offer above the true value of the company.
I'd say the odds of success with the tactic you've put forward are slim, and have the potential to worsen your position greatly.
The factors you don't know are how much each director wants to leave the business and retire, and, if they did, how much they'd need to do what they want with their retirement.
If it is something that they really don't want to do, and/or are holding out for a windfall from a big company buying them out then you are bound to fail.
If it were me, before even thinking of making offers would be to have an informal chat when the situation arises to find their plans and thoughts. Then, there's no harm done if the offer you put forward were to bring offence.
2lefthands said:
Our intention is to clear Q1 2015 and then slap a proposal on the desk of 2 directors and retire to a safe distance and enjoy fireworks.
Background to the business; 21 years old, niche tech company with fantastic employees but 1 director lazy and often absent when required in a financial control role and other approaching retirement age and also part time already whilst not having any need to attend (no function that a part time, living wage employee couldn't carry out). They built the business from nothing and are fiercely protective (the amount of times I cringe hearing the "how is our baby" comment when they've been absent for days...) whilst happy to call on a Monday and notifying us that they are on the way to the airport for a 3 week break.
Sounds like they are starting to enjoy the fruits of their two decades of hard work, establishing and building a successful business. Maybe they are slightly risk averse and are happy with the size of the business as it is.Background to the business; 21 years old, niche tech company with fantastic employees but 1 director lazy and often absent when required in a financial control role and other approaching retirement age and also part time already whilst not having any need to attend (no function that a part time, living wage employee couldn't carry out). They built the business from nothing and are fiercely protective (the amount of times I cringe hearing the "how is our baby" comment when they've been absent for days...) whilst happy to call on a Monday and notifying us that they are on the way to the airport for a 3 week break.
As mentioned above, I would start by having an informal chat. Perhaps start by saying that you really love working for the company and are just wondering whether they have any long term plans about selling up or merging. If they react positively, then you could broach the idea of an MBO just to gauge their reaction. This way you avoid all the effort required to put a proper proposal together, and any damage that might be done if they react negatively to it.
Assuming they would consider selling, the valuation will always be the sticking point. Many small business owners have totally unrealistic ideas about this, and often it kills the idea stone dead.
It's clear from your post that you don't have a great deal of time for the current owners, but the end of the process you'll probably like them even less, but they hold the key, so relationships are key. Not openly discussing how lazy they are with your colleagues would be a good start.
Bear in mind, also, that just because the owners are not at their desks, does not mean they are not working.
Running a business is not for the faint hearted, especially when it's likely that you'll start off by betting a pretty large amount of your own money/borrowed money on its future success.
Assuming they would consider selling, the valuation will always be the sticking point. Many small business owners have totally unrealistic ideas about this, and often it kills the idea stone dead.
It's clear from your post that you don't have a great deal of time for the current owners, but the end of the process you'll probably like them even less, but they hold the key, so relationships are key. Not openly discussing how lazy they are with your colleagues would be a good start.
Bear in mind, also, that just because the owners are not at their desks, does not mean they are not working.
Running a business is not for the faint hearted, especially when it's likely that you'll start off by betting a pretty large amount of your own money/borrowed money on its future success.
Edited by anonymous-user on Friday 20th March 11:08
hornetrider said:
Sounds like they are starting to enjoy the fruits of their two decades of hard work, establishing and building a successful business. Maybe they are slightly risk averse and are happy with the size of the business as it is.
I agree. One of the directors may appear to be lazy but he/she is the one who has created a successful business from scratch and surrounded themselves with good people. JustinP1 said:
If it were me, before even thinking of making offers would be to have an informal chat when the situation arises to find their plans and thoughts. Then, there's no harm done if the offer you put forward were to bring offence.
I would be more amenable to this than if my team just came and slapped down an offer. All comments taken on board.
On the laziness issue - it's even admitted by the guilty party, he's reasoning being that half his salary is his time. The problem comes about when he's the sole person responsible for signing cheques to pay suppliers, leading to diminished relationships and delays to clients.
The softly softly chat was had a year ago, after they rejected a buyout offer from a competitor. The numbers and plan are based around their comments at the time.
The payment from profit generated in years 2-6 would be on top of their drawings as directors. There is finance in place to pay the lot in one go, but potentially eradicates working capital from the point of agreement (they would intend to be repaid their directors loans which form a considerable sum of cash in bank for the business).
On the laziness issue - it's even admitted by the guilty party, he's reasoning being that half his salary is his time. The problem comes about when he's the sole person responsible for signing cheques to pay suppliers, leading to diminished relationships and delays to clients.
The softly softly chat was had a year ago, after they rejected a buyout offer from a competitor. The numbers and plan are based around their comments at the time.
The payment from profit generated in years 2-6 would be on top of their drawings as directors. There is finance in place to pay the lot in one go, but potentially eradicates working capital from the point of agreement (they would intend to be repaid their directors loans which form a considerable sum of cash in bank for the business).
I've done an MBO although it was just a small loss-making division of an £84m t/o company and not in your league. It was fairly painless in the end as while we were planning it the parent company CEO actually suggested it.
Prior to that however we were thinking that we might need to be aggressive and we took advice from a professional consultancy. Their advice was that it was a one shot deal. We walk into the CEO's office and put it all on the line being prepared to walk out of the business if we didn't get agreement.
If you are prepared to walk away from the company, and if you are valuable enough to the currently owners, you would effectively be, implicitly, holding a gun to their heads. They sell out to you or they have a massive problem. This is the best way to get a really good deal for yourself as you are saying 'Take £x from us or half your business walks out of the door today' Otherwise you are simply asking them to name their price when they have no pressure to sell to you.
The idea of them carrying on working for you afterward is hard. Maybe a clean break would be better for all.
Prior to that however we were thinking that we might need to be aggressive and we took advice from a professional consultancy. Their advice was that it was a one shot deal. We walk into the CEO's office and put it all on the line being prepared to walk out of the business if we didn't get agreement.
If you are prepared to walk away from the company, and if you are valuable enough to the currently owners, you would effectively be, implicitly, holding a gun to their heads. They sell out to you or they have a massive problem. This is the best way to get a really good deal for yourself as you are saying 'Take £x from us or half your business walks out of the door today' Otherwise you are simply asking them to name their price when they have no pressure to sell to you.
The idea of them carrying on working for you afterward is hard. Maybe a clean break would be better for all.
Note that I know nothing about anything, but it would seem to me, that there is nothing you are offering that is scary enough to make them want to.
If the only thing stopping you setting up alone is a belief that it would be immoral, then you need to get a grip. The only thing that's stopping them selling it to you is knowing that you aren't going to leave and compete with them.
I think you'd be better off looking for the niche market which kind of compliments what they do rather than competes, and threaten to leave and set up alone, in this none competitive side line. Without you lot they stand to loose the lot, so that's the point where you can start to have the discussions.
If the only thing stopping you setting up alone is a belief that it would be immoral, then you need to get a grip. The only thing that's stopping them selling it to you is knowing that you aren't going to leave and compete with them.
I think you'd be better off looking for the niche market which kind of compliments what they do rather than competes, and threaten to leave and set up alone, in this none competitive side line. Without you lot they stand to loose the lot, so that's the point where you can start to have the discussions.
"Lazy director". I work within my family business (had to pay my dues elsewhere before I was allowed to jump on the "gravy train" by proving I knew how to manage both ops and sales guys) and the amount of times people moan about the MD hardly being there makes me laugh. My dad genuinely cares about all his employees and is aware that they depend upon him for their livelihoods, yet they think he has done nothing other than play golf for 15 years and is just a lazy guy.
I don't know the exact circumstances of your company OP, but I would say that the "lazy director" has probably done years of early legwork and is obviously a good manager if he's been able to surround himself with good workers.
Saying that, you will know the business you work within a lot better than a stranger on the internet, I just get irked when I hear about "lazy directors" because they are the people who built the business up and are entitled to run THEIR business how THEY see fit.
I don't know the exact circumstances of your company OP, but I would say that the "lazy director" has probably done years of early legwork and is obviously a good manager if he's been able to surround himself with good workers.
Saying that, you will know the business you work within a lot better than a stranger on the internet, I just get irked when I hear about "lazy directors" because they are the people who built the business up and are entitled to run THEIR business how THEY see fit.
BrabusMog said:
"Lazy director". I work within my family business (had to pay my dues elsewhere before I was allowed to jump on the "gravy train" by proving I knew how to manage both ops and sales guys) and the amount of times people moan about the MD hardly being there makes me laugh. My dad genuinely cares about all his employees and is aware that they depend upon him for their livelihoods, yet they think he has done nothing other than play golf for 15 years and is just a lazy guy.
I don't know the exact circumstances of your company OP, but I would say that the "lazy director" has probably done years of early legwork and is obviously a good manager if he's been able to surround himself with good workers.
Saying that, you will know the business you work within a lot better than a stranger on the internet, I just get irked when I hear about "lazy directors" because they are the people who built the business up and are entitled to run THEIR business how THEY see fit.
I could not agree more. I don't know the exact circumstances of your company OP, but I would say that the "lazy director" has probably done years of early legwork and is obviously a good manager if he's been able to surround himself with good workers.
Saying that, you will know the business you work within a lot better than a stranger on the internet, I just get irked when I hear about "lazy directors" because they are the people who built the business up and are entitled to run THEIR business how THEY see fit.
Ossiantoad said:
I've done an MBO although it was just a small loss-making division of an £84m t/o company and not in your league. It was fairly painless in the end as while we were planning it the parent company CEO actually suggested it.
Prior to that however we were thinking that we might need to be aggressive and we took advice from a professional consultancy. Their advice was that it was a one shot deal. We walk into the CEO's office and put it all on the line being prepared to walk out of the business if we didn't get agreement.
If you are prepared to walk away from the company, and if you are valuable enough to the currently owners, you would effectively be, implicitly, holding a gun to their heads. They sell out to you or they have a massive problem. This is the best way to get a really good deal for yourself as you are saying 'Take £x from us or half your business walks out of the door today' Otherwise you are simply asking them to name their price when they have no pressure to sell to you.
The idea of them carrying on working for you afterward is hard. Maybe a clean break would be better for all.
What utter pony. Prior to that however we were thinking that we might need to be aggressive and we took advice from a professional consultancy. Their advice was that it was a one shot deal. We walk into the CEO's office and put it all on the line being prepared to walk out of the business if we didn't get agreement.
If you are prepared to walk away from the company, and if you are valuable enough to the currently owners, you would effectively be, implicitly, holding a gun to their heads. They sell out to you or they have a massive problem. This is the best way to get a really good deal for yourself as you are saying 'Take £x from us or half your business walks out of the door today' Otherwise you are simply asking them to name their price when they have no pressure to sell to you.
The idea of them carrying on working for you afterward is hard. Maybe a clean break would be better for all.
I've employed lots of people who thought they were utterly essential to the success of the company, in most cases, it turned out that they weren't.
Birkin1932 said:
Did they also help write the script for Wall Street
If a member of my team did that, I would literally laugh at them.
As far as I know they are not involved in script writing and we didn't take their advice in the end. Plenty of people have though as can be seen from this page where all of their successful transactions are listed:If a member of my team did that, I would literally laugh at them.
http://resolution-partners.co.uk/transactions/
Gassing Station | Business | Top of Page | What's New | My Stuff