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Buying Out Your Own Company is not just for Christmas


Over the last few weeks several thousands of dogs and cats will be sent to the RSPCA, given away or even put down or drowned because their owners didn't want the commitment from owning them. Buying out your own company, like getting a fluffy pet at Christmas, is not just for Christmas, it is for the long term.

Often, when a management team thinks about performing a management buy out, they get focused on the process and enticed by talk of their share of the pie sometime down the road.  Stories of £millions, the glamour of high powered advisors and the sweet talk of Private Equity investors flatter and fetter the management team. The cold light of post deal business as normal often comes as a shock. 

The most critical time for a management buy out is just after the sale and the first year.   Once the excitement of the buyout has gone, the managers are left with their projections and investors with the promises they have been given (often enshrined in the agreement linked to painful warranties).

Many case studies reveal that, even though managers say they don't over egg the projections for their business, their subconscious works in mysterious ways with the promise of financial independence just a step away. When the suits disappear and it is business, not as normal, but on the steroids of the optimistic business plan, the reality seeps in.

The basic rule of buy outs is the 3x rule.  It takes three times as long to get funding, three times as much effort to reach business plan and you need three times the staying power to reach the goal of the windfall at the end.....which will be three times further away than you hoped, if not planned for.   The CEO of the team must ensure there is hope tinged with reality and that plans stretch but don't break after the buyout.

In addition to this, a management buy out taxes the support staff - legal, financial and HR up to the buy out but they are then expected to go into the back offices once again afterwards.  Those managers, often operational, who performed a small part in the buyout process will be then in the spotlight.  The CEO must recognise that his key people - even old and trusted staff - thrive on attention as all humans do. The buyout process causes this to be warped in many ways and the fall out can be dramatic.  The share each manager gets of the equity will magnify these concerns and ill feeling often makes key people leave the organisation.

So a Management Buy Out is not just for Christmas, it is a long hard slog. However, if you manage the strains and stresses and be prepared for the unexpected, Santa may well be delayed but his sack will be full enough to pay for Christmas ever after.Posted by at 06:02