News – 01-NOV-04

If you’re an entrepreneur at heart, the time may be right to turn that potential into reality.

Being an entrepreneur is not for the faint of heart. Amongst a group of 10 young managers or professionals, statistics tell us that only one has what it takes to be a business owner. I am sure that many readers of Jobber News Magazine aspire to be entrepreneurs.

Current aftermarket conditions may make this one of the best times to pursue the opportunity. One of the best methods is through a management buyout, but it is not an opportunity to be taken lightly.

What separates entrepreneurs from dreamers is their ability as individuals to invest somewhere in the vicinity of $250,000 into the companies they hope to own. This number can be as high as $1 million in some of the larger deals. If you want to own something, you have to put your money and likely your job at risk.

If you are unable to put your money on the table, stop dreaming.

A substantial financial investment is critical for a serious management buyout, because outside investors, institutional or private, need to know you are committed.

Institutional investors request private investors that have some management background or special knowledge in the industry to invest with them. Institutions refer to these investors as the “smart money.” If something goes wrong or an important decision needs to be considered, the institutional investor wants to have some other intelligent investors as part of the deal to help them work the issues out.

To ensure the success of a leveraged acquisition, it is extremely important to establish an appropriate capital structure. You will need to understand and present your written business plan detailing seasonality, cash flow cycles, capital expenditure requirements and other such factors.

Some preferences presented by lenders when financing a buyout include companies that are not highly cyclical and have steady, predictable cash flows; companies with low capital expenditure requirements and high free cash flow; growth businesses, especially in high value-added manufacturing; and companies with strong committed management teams and well-communicated, compelling business plans.

Meeting these requirements can be a challenge for company employees, managers or executives.

For those who are unaware, management buyout opportunities present themselves often and for a number of different reasons. The first and most common reason is that a company or division no longer fits within the strategic aims of the parent group or owner. Another reason may be that the parent group or owner simply requires liquidity or cash. Profit levels may not be considered acceptable, or the company is showing a loss.

Other reasons include a private owner who wants to sell his business and not bother with the complicated process of selling to an outside buyer. Usually this seller has a very good relationship with the management team and has confidence in their ability to manage the business. This type of owner usually retains some equity ownership or assists in financing the business with vendor take-back notes.

Management-led buyouts are generally regarded with great favour.

Before beginning, however, it is extremely important that management agree that they have an arrangement amongst themselves, as infighting is a major reason deals fall apart, and that they enlist a professional and experienced intermediary. This professional will help package the opportunity, set up the process, structure the buyout deal, and negotiate with financiers and ultimately the owners. And let’s not forget the legal, accounting, tax and other levels of expertise that need to be integrated into the deal.

Maybe it is a fluke in the business cycle, but seldom has there been more diverse, abundant and less expensive investment capital available chasing too few deals. There is no excuse for talented management teams not to take hold of their future and at least attempt to do a management buyout when an opportunity arises.

Mark Borkowski, president of Toronto’s Mercantile Mergers & Acquisitions Corporation. Mercantile Mergers & Acquisitions have been mergers and acquisitions brokerages firm since August 1987, and have consummated over 79 transactions. Mark Borkowski is founder and president. He can be contacted at mercant@interlog.com.