There are several exit strategies for a business owner.
A buyout by the core management is one option that has many positives and should be considered.
This can be a very satisfying exit option.
The owner has put everything into building this business, assisted by a capable management team.
Seeing that team carry on can be rewarding. The trusted managers will carry forward the owner’s vision.
From the management team’s perspective, it is an opportunity to own their own business.
But there are potential pitfalls. Major pitfalls. Perhaps most importantly. a company’s positive culture can be harmed should the owner and management disagree and fight with each other during the buyout process. This can happen.
During the time the owner is thinking of retiring, and when the management is negotiating the deal terms, things can change before the buyout is implemented.
The business can be doing well at the beginning of the process and not so well later.
Has the personal circumstances of the owner changed? Maybe a divorce?
Has the economy improved (or become worse)?
Has the acquisition market changed during that time?
What if the owner changes their mind about selling? Management will certainly not react negatively. Some may quit, others may even try to sabotage the business. It happens.
Another danger point: will someone in the management leak information that the business is for sale? This can cause problems with employees, customers, and vendors.
Financing can be an issue too. The management team buying the company may not have the cash to buy the business. Even if the majority of the buyout is leveraged (loans), management may not have the ability to raise even the minimum cash necessary in a highly leveraged transaction.
The sales price is also a problematic issue in management buyouts. The owner will likely be looking to get the best possible price in a sale. However, the management team may argue for a reduced price because they believe they helped to create value for the company.
The conclusion is that selling a business to employees can be a sensitive and tricky process that needs to be carefully managed over a long period of time.
