You are the owner of your business and you have been anxious about having to go through a marketing and sales process and then not knowing what will happen to your employees. So what you think is the perfect solution appears within your organization. You have been approached by a key manager or group of managers with a proposal to buy the business. The discussion then turns to how you can avoid having to take the company to market and how the management buyout will provide certainty for the continued employment of your employees.

Well nothing could be further from the truth. One of the first things management will say is that they can put up at least 25% of the purchase price. Let’s use a sale price of $50 million, which means they would provide $12.5 million. TRANSLATION: “Management believes a bank will lend them $12.5 million against company assets.” So what management is really doing is the same thing that any buyer would do, which is, using their assets to obtain senior debt from a bank for a portion of the purchase price. They are not putting their own money into the deal as equity.

Since the managers have little to no funds, they will now be tasked with going to the market to find private equity funds and intermediate lenders to finance the balance of the transaction. TRANSLATION: “You are not avoiding taking the company to market, but, in effect, you have put the marketing process in the hands of management instead of controlling the process yourself.” Numerous articles have been written over the years that address the inherent conflict that exists when the person who markets the company (management) is the same person who buys the company (management). Two key problems arise. First, management has no incentive to get investor groups to place a high value on the company because it will reduce the percentage that management can retain. A value of $50 million may require a capital investment of $20 million. If management has $4 million to invest and outside investors add $16 million in equity, management only gets 20% interest. However, if the total price is $40 million with only a capital requirement of $10 million, the investor’s capital would only need to be $6 million and management would retain 40% of the Company. SecondA quasi fundraising and marketing campaign by managers will contaminate the buyer pool in many ways that will be detrimental to a future sale if management is unsuccessful.

The managers will assure you that they will be the ones doing the heavy lifting to close the deal and that it will not be onerous for you. TRANSLATION: “Instead of putting all their attention on running the company, management will now be busy trying to organize their own group of buyers and trying to raise funds. Plus, you and the company will have to do the same (and usually more) work.” ) by providing due diligence information to various private equity groups and lenders.” No investor will provide $50,000,000 in financing without testing it.

Management is also in for a few surprises. Management told him how they are going to buy the company and protect the employees. TRANSLATION: “He who has the money rules and if management doesn’t put in a significant portion of the capital, management won’t control the company.” Investors will control the company and operate it for the highest rate of return without regard to the retention of all employees.

You, however, could be in for the biggest surprise of all! Even if you sell to management, what’s to stop them from reselling the company in six months, a year, or whenever? Thus, even if management, through an unusual set of circumstances, did gain control, it could resell in a short period of time to a wholly unowned party and the guarantee to its employees and continuing legacy that it thought it held was no longer exist. Management might even double escrow the deal. While it garners financial backing from management at the price of $50 million, management may be negotiating a follow-up transaction for sale at a higher price.

You were probably told that the purchase by management would also prevent the likelihood of the world knowing it’s for sale. Conversely, since many people will have to be a part of management’s buyout process, your employees and the rest of the world are much more likely to know that you’ve put a “for sale” sign on the business. It is much easier to maintain confidentiality in a well-run marketing process.

If the issues mentioned above aren’t worrisome enough, this should get your attention. “You will be negotiating against your management in the buyer/seller process.” Negotiations can become intense, and generally the management side will try to satisfy numerous parties, including lenders, private equity groups, and each individual manager’s interests. Some hard feelings in the context of a full management buyout might be fine, but “some hard feelings” can turn into blatant animosity if you decide the final management package isn’t a good fit and your deal falls through. Now, when you’re ready to go to market, you’ll be doing so without one of your most valuable assets, which is a motivated manager or management team. Management will also have expended a great deal of energy trying to close the deal and will have a very limited appetite (and even less enthusiasm) for wanting to go through another sales process again.

Proceed very cautiously (if you want to proceed) if your manager or management team wants to try to buy your company. It’s something that sounds good and you want it to be true, but it’s usually not true. However, if the owner intends to pursue a management buyout, the advice of an M&A law firm will be your best ally in maneuvering through all the minefields and giving you the best chance of closing. a transaction on satisfactory terms and conditions.