Interview: The Management Buyout (MBO) Alternative

Looking at a Management Buyout Business Sale in Hindsight

interview-in-progressThere can be no denying the wisdom of hindsight. Looking at things that have already happened gives us important insights and learning. The paradox with the hindsight is that you cannot go back in time and fix things that went wrong. However, we can all learn from other people’s experiences when we are going to do something important in our life. Getting a university degree, setting up and running a business, and selling a business are some of the important things in life where we can gain lots from looking at other peoples’ experience.

Selling a business was a conscious choice that Sandra and her husband made. They were running a creative services agency with many blue chip companies as clients, and they ran it successfully for over thirty years. Then, one fine morning, they realised that the passion had gone out of their work. Their decision to sell the business as a management buyout and walk away to something new had “different motivators for each director”, says Sandra when asked what prompted them to exit the business. “My husband was tired of running the business for over thirty years and wanted to have some easy time. I wanted to move to something new. I had fallen out of love with the business.”

For many people, the desire to have a leisurely life or to do something new can be powerful motivators for planning a business exit. Many entrepreneurs start businesses that they are passionate about. They take pleasure and get their kicks out of what they do, and that’s why they are often successful. After you have done something for a long time, it often loses its charm. It’s the same with business. It is natural to feel that you have had enough, or that you are not interested in the business as much as you used to be. At such moments, it is best to think about a business exit before the diminishing interest takes a toll on the business performance. You know that you have arrived, and you want to celebrate your success.

“What was your original business exit plan?”, I asked Sandra.

“As major shareholders, my husband and I wanted to sell the business to the remaining two directors first. We thought it would be much simpler and easier, as the directors already knew everything about the business performance and strengths.”

Sandra and her husband were taking the obvious route to business exit and chose to take the management buyout option. However, as she would later realise, selling a business to management was much more complicated than she and her husband had initially thought. Negotiating with their directors over a long period of time turns out that it was not something they were fully prepared for.

The process was emotionally “very hard”, says Sandra. “…when business partners that you had excellent working relationship with, and previously had always pulled towards to same ends suddenly had to negotiate with each other. The uncertainty is horrible with the changing scenarios – one day the sale is on – one day the sale is off – emotional roller coaster.”

You can never afford to underestimate the complexity and the emotional stress of going through the process of a business sale. When selling the business internally, be prepared to detach emotionally from the people you’ve been working with and concentrate on a fair deal. The sale process is full of uncertainties and surprises, so be prepared. At the end of the day, you don’t want to throw away the business. You want a price that should reward you for your hard work, and leave you enough money to start whatever you are planning to start next.

“We backed out of the sale”, said Sandra when asked about the final outcome. “The sale value was not enough on its own to make us financially independent, and our next business ideas needed time to start monetising, and so in the end we realised that the sale value was simply not high enough for us. We are now looking to put long term value into the business – which we should have done years ago!”

There you have it. There’s no harm in walking away from a business sale when you feel that the price and the terms do not suit your interest and doesn’t reflect the true value of the business, why give it away to someone else if you can do more with it yourself? Though, be prepared for the repercussions that it would have, as you might not be on the same terms with your directors and other parties that you’ve been trying to sell to.

I wrapped up the interview by asking Sandra, “In hindsight, what are the things would you have done differently, if anything?”

“There’s 1 thing I would do differently. And that is to build long term value into the business. Realised that the main value of the business was US, which is useless if you want to sell. If I had my time again I would (1) develop products using the skills developed during my career and (2) Develop IP around the methodology that our business has built up, eg. by writing a book on this methodology – and create thought leadership position.”

Those reflections are interesting as more and more businesses these days look for ways to innovate and stand out for the crowd. Creating products provides another string to the business bow and can help in times of uncertainty and help smooth out those seasonal variations. On a last note, I did mention to Sandra that it wasn’t too late to take heed of her own findings and enjoy the journey of their management buyout alternative.

Joanna Miller, Co-Founder of Business Wand, helps business owners navigate their way through the start to finish process of selling a business.  Her specialty is helping owners understand how to prepare and make the most of their business sale process to maximise their company’s value. To understand how you can sell your business quickly for the highest sales price, purchase her book, “How To Sell A Business: The #1 guide to maximising your company value and achieving a quick business sale