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Accelerate

YourExit

ManagementBuyoutsfora

QuickerandBiggerPayday

ByStephenEpstein

General Information

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©CopyrightStephenEpstein2019.Allrightsreserved.

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orbyanymeansmechanicalorelectronic,includingphotocopyingand

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roletothemaximum.

Publishedby:StephenEpstein,718ThompsonLane,Suite108-273

Nashville,TN,37204

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Whileallattemptshavebeenmadetoverifyinformationprovidedinthis

publication,neithertheAuthornorthePublisherassumesany

responsibilityforerrors,omissions,orcontraryinterpretationofthe

subjectmattergiveninthisproduct.

ThePublisherwishestostressthattheinformationcontainedinthis

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lawsorregulations.

TheReadermustacceptfullresponsibilityfordeterminingthelegality

and/orethicalcharacterofanyandallbusinesstransactionsand/or

practicesadoptedandenactedinhisorherparticularfieldandgeographic

location,whetherornotthosetransactionsand/orpracticesaresuggested,

eitherdirectlyorindirectly,inthisprogram.

ISBN:978-0-359-59766-6

TABLE OF CONTENTS Welcome to MBO Exit ............................................... 1

Introduction ........................................................... 3 A Better Option ................................................................ 5 The Right Moment ............................................................. 5 In This Book ..................................................................... 6

Three Problems to Solve Before You Sell Your Business .... 8

Problem #1: Building the Right Team ............................... 9

Problem #2: Being Realistic About Your Options and the Value of the Company ........................................................ 11

Inflated Ideas .................................................................. 12

Problem #3: Not Starting the Process of Positioning Your Business for Sale Early Enough ...................................... 13

The Business Environment ....................................... 16

Demographics and Market ............................................ 18

The Baby Boom Goes On ............................................. 20 Bad News for Sellers .......................................................... 20

Lack of Planning ....................................................... 22

The Options for the Business Owner .......................... 24

Option #1: Sell to Family ............................................. 25 Funding the Purchase ........................................................ 25 Changing Trends ............................................................... 26

Option #2: Sell to Private Equity ................................... 28 What Private Equity Looks For .............................................. 29

Option #3: Sell to Individuals ....................................... 31

Option #4: Sell to a Strategic Buyer ............................... 32 Limited Option ................................................................ 33

Option #5: Do an Employee Stock Ownership Program ........ 34

Limited Benefits .............................................................. 34 Loss of Control ................................................................ 35

Option #6: Management Buyout ..................................... 37 The Best People .............................................................. 37

Overview ................................................................. 40

Why Management Buyouts Are Attractive ................... 41

So Why Not More Management Buyouts (MBOs)? ............ 43 Lack of Skills .................................................................. 43 Lack of Finance ............................................................... 44 Getting Out Fast .............................................................. 44

How a Management Buyout Works ............................. 46

Management Buyout Example ........................................ 49 Requirement .................................................................. 49 Financing ...................................................................... 51

Next Steps ........................................................... 53 Finding Buyers ................................................................ 54 Avoiding Bad Deals ........................................................... 55 Partnership .................................................................... 56 Key Questions ................................................................. 57

About the Author .................................................. 60

About MBO Exit .................................................... 62

The Path

1

WELCOME TO MBO EXIT

ThisbookisbroughttoyoubyMBOExit,whichspecializes

inhelpingcompanyownersselltheirbusinessestotheir

employees.

Inthesepages,we’llbecoveringtheissuesandoptionsaround

sellingyourbusinessandexplainingwhyandwhensellingto

employeesthroughamanagementbuyoutmaybeattractive.

We’llalsoexplainhowyoucanfindoutmore.

Inwelcomingyou to thisbook,here are somekey facts you

shouldknow:

• We believe most entrepreneurs with eight-figure

businesses would sell their companies to their

managementteamsinaheartbeat if theycouldfigure

outHOWtodoitANDstillbeabletocash-out/walk

away.

• Webelievethat thepeoplewhohelpedbuildandrun

these valuable companies make the best buyers, not

somestrangerorprivateequityfirm.

• Wedomanagementbuyouts,whichmeanswepartner

with proven management teams to provide the

Accelerate Your Exit

2

necessary capital to help them buy the companies

they’realreadyrunning.

• We’redifferentfromtraditionalprivateequitygroups

becausewedon’twanttoown100%ofthecompanies

we buy, we want the management teams as true

partners,notemployees.

• Our investment partners have funded dozens of

management buyouts and helped dozens of

entrepreneursachievehugeexits.

Wehopeyoufindthebookuseful.

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3

INTRODUCTION

Ifyou’regettingreadytosellyourcompanyandretire,or

you’re just ready for something new, then I’m sure you

reallycareabouttheseimportantpriorities:

• Cashingoutbeforethenextrecession

• GettingTOPdollarforyourcompany

• NOTspending12 to24stressfulmonthspullingyour

hair out working on the complicated and painful

processofsellingtobuyerswhomayormaynotclose.

The ability to find a qualified and serious buyer is the

differencebetween:

• The failure of 12 costly months of total hell which

resultinNODEAL

or

• The success of walking away from the closing table

deliriouslyhappywithwheelbarrowsfullofcashanda

greatdealcompleted.

Thestakesareveryhighintermsoftime,money,andsanity

when it comes to selling your company. But here’s the

problem…


4

Only5%ofcompanieslistedforsaleactuallytransact.

Thosearen’tgoododds.

That’swhyit’simportanttocarefullyconsiderthebestoptions

availableforsellingyourbusiness.

Inthisbook, I’llsharehowbesttosetyourselfupforselling

your company, what you need to look out for and what

problemsthatyouneedtosolve.

I’ll also go intomoredetail aboutmanagementbuyouts and

explainwhyit’stheoptionthatcouldbebestforyourbusiness,

eventhoughitmaybeoneoftheleast-known.

Thefact is, inmostcases, thepeoplewhohelpbuildandrun

your valuable company make the best buyers for your

company,notsomestrangerorprivateequityfirm.

I believe that as a business owner thinking of selling, you

would sell your company to its management team in a

“The people who helped you build your company make the best buyers if ONLY they had the money…”

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5

heartbeatifyouhadawaytodoitandstillbeabletocashout

andwalkaway.

A BETTER OPTION The truth is, right now some business owner, who doesn’t

knowanybetter,isruininghisorherhealthandis“stressed

out of their mind” trying to pull together 650 pieces of

documentationandpaperworktopleasetheirpotentialbuyer.

Meanwhiletheprivateequitybuyerislaughingbecausethey

know,themorepainfultheprocess,themorelikelytheseller

istocave-inattheveryendandgiveupamajorconcession.

Anotherbusinessowner somewherehas spent thousandsof

hours and tens of thousands of dollars working with some

incompetentbusinessbroker,onlytodiscoverthattheirbuyer

isjustatirekicker.

Weoftentalktosellersaftermonthsoryearsoffailuresand

heartacheofthemtryingtoselltheirbusinesses.Wecanhelp

themandoftendo.

Wesolvetheirenormousproblemof“howdoIexitrich?”.But

howmuchhappierwouldtheybeiftheyhadfoundussooner?

THE RIGHT MOMENT There’salotofbuzzrightnowaroundbabyboomersretiring

andthelargeincreaseinnumbersofbusinessesforsale.


6

What’s driving this? You probably already know… It’s the

perfectstormofeconomicanddemographic factorscreating

anincentiveformanyagingbusinessesownerstoSELLwhile

theeconomyisinanupswing.

Valuationsarealsohistoricallyhighthesedays,partlydriven

bythewideavailabilityofcapitalandlowinterestrateswhich

makeothercomparableinvestmentslessappealingonarisk-

adjustedbasis.

IN THIS BOOK Mygoalinthisbookistogiveyouenoughvaluableinformation

aboutalltheoptionsforsellingyourbusinesssothatyoucan

makeadecisionaboutwhetherit'stimetosellyourcompany

andhowtodoitinthebestwaypossible.

Inparticular, thisbookwill educateyouon theprocessof a

management buyout and will help you determine if a

managementbuyoutisrightforyourcompany,andhowmuch

interesttherewouldbefromafirmlikeoursinpartneringwith

youtopullitalloff.

Then,ifyoudowanttomoveforward,we’llcoverhowitwould

bebesttogoaboutpositioningyourcompanyforsaleandwhat

aresomeofthepitfallsandproblemsyouneedtobeawareof.

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7

Ihopeyoufindthisbookusefulandthankyoufortakingthe

timetoreadit.

StephenEpstein


8

THREE PROBLEMS TO SOLVE BEFORE YOU SELL

YOUR BUSINESS

There are three key problems youneed to solve before

youcansellyourbusinessinthebestwaypossible.

We’llgothrougheachofthemhere.Thethreeproblemsare:

1. Buildingtherightteam.

2. Being realistic about youroptions and realistic about

thevalueofyourcompany.

3. Knowing when to start the process – most

entrepreneurs andbusiness sellerswait too long and

then don't start positioning their company soon

enough.

Let'sdiverightintothesethreeproblems.

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PROBLEM #1: BUILDING THE RIGHT TEAM

The first problem is building the right exit team. Most

businessesintheircurrentstate,frankly,aren'tsellable.

So,thefirstthingyouneedtodoisdetermineifyourcompany

can even be sold or not before you go through the painful

exerciseoftryingtohireabusinessbrokerorventurecapital

firm.

Whenyoustartthatprocess,youcouldenduppayingtensof

thousands of dollars to put together expensive decks and

offering packages to potentially shop your company. You're

goingtospendmoneyonattorneysandCPAs.

Therefore,beforeyoudoanyofthat,it'sreallyimportantthat

youdetermineifyourcompanyisevensellable.

Mostcompanies,unfortunately,arenotsellable.Well,theyare

foraprice,butnotforapricethatyouwouldtake.

“Most businesses in their current state, frankly, aren't

even remotely sellable.”


10

So,forallintentsandpurposes,they'renotsellable.Ofcourse.

youcoulddumpittosomebody,butthat'snotwhatIconsider

asuccessfulexit.

The reason that most companies are not positioned for

successfulexitisoftennothavingtherightteaminplace.

We'regoingtoidentifytheseproblemsandthenwe'regoingto

trytosolvethem.

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11

PROBLEM #2: BEING REALISTIC ABOUT YOUR OPTIONS

AND THE VALUE OF THE COMPANY

Thesecondproblemisbeingrealisticaboutyouroptions

andthevalueofyourcompany.

Oftentimes,areasonthecompanyisnotsellableisbecausethe

businessownerovervalueshowmuchthecompanyisworth.

They may say, "I want four times earnings, and I want the

potentialbuyerofmycompanytopaymethebookvalueofall

ofmyassetsrightnow."

Frankly,theassetsinyourbusinessareusedtogeneratethe

revenue that you've got. So, they typically comewithin that

fourtimesmultipleonyourearnings.

“Oftentimes, a reason the company is not sellable is

because the business owner overvalues how much the

company is worth.”


12

INFLATED IDEAS Thatmaynotbethecaseifyouhavetoomanyassets,inwhich

caseyoumaywanttosellsomeorthepotentialbuyermight

sellsomeandthenessentiallybeabletopayyouapremium

forit.

Sellershavetheseoverinflatedvaluesofwhattheircompanies

areworthbecausetheywantamultipleontheircompany,and

then they alsowant to sell off all their assets like it's some

separate thingwhen it's not. It's part ofwhat generates the

value.

So,youneedtobeclearaboutthevalueofyourcompany.

Obviouslygettingabusinessvaluationisastart,butwhatthe

market is willing to pay is different than what a business

valuationmayuncover.

Thatmeans that being realistic about your options and the

valueofyourcompanyiscriticaltothesuccessofasuccessful

exit.

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13

PROBLEM #3: NOT STARTING THE PROCESS OF

POSITIONING YOUR BUSINESS FOR SALE EARLY ENOUGH

Problem number three, not starting the process of

positioningyourbusinessforsaleearlyenough.

This is a big problem aswell because oftentimes somebody

thinksaboutsellingandthinksaboutsellingandthinksabout

sellingforyearsandthenwhenthey'rereadytosell,theyare

sickandtiredoftheirbusiness,they'reburntout.

Theydon'twanttodoitanymore.That'swhentheysay,"Okay,

it'stimetosell."

Andfrankly,bythatpoint,there'slotsofthingsthatyoushould

havestarteddoing,likemakingsure:

• Everyprocessisdocumented

• Everysystemisoutlined

• Everyimportantkeyroleisfilled.

Thereareimportantstepsthathavetohappen,aheadoftime,

andthatissomethingthatpeopleveryoftenneglect.

So, it’s important to start the process of positioning your

businessforsaleearlyenough.


14

Theactualsaleofthebusinesscouldbesomethingveryquick

providedyou'vedonethelegworktopositionthebusinessso

thatitisasellablebusinessandapurchasablebusiness.

Youhavetothinkofyourbusinessandofbuyingyourbusiness

throughtheeyesofthebuyer,notyourowneyesastheseller.

It'sverydifferent.Youhavetotakeyourhatoffasthesellerof

thebusinessandputthehatonofthebuyerofthebusiness.

Youneedtopretendyouknownothingaboutyourindustryor

pretendyouknowalotaboutyourindustry.

Youhavetodevelopthecapabilityoflookingatyourbusiness

withfresheyesthewayanoutsiderwouldseeit.Oftentimes,

thatcanbealittlebitdifficult.

“Oftentimes, somebody thinks about selling for years and then when

they're sick and tired of their business, they're burnt out.”

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15

You need to pretend you're buying your own business and

determine howmuch youwould pay for it and think about

whatquestionsyouwouldask.

Justswitchtherolethatyouplay,anditwillbeveryrevealing.

That’sanexercisedefinitelyworthdoing.

So,thesearethethreekeyproblemsthatneedtobeaddressed

inordertohaveasuccessfulexit.

“You have to develop the capability of looking at your business with fresh eyes the way an outsider

would see it.”


16

THE BUSINESS ENVIRONMENT

Beforewegoanyfurther,let’sgothroughalittlebitofthe

context of the economy and the environment in which

you'reoperatingwhenyousellabusiness.

Thisisimportantbecausebusinessesaresoldinamarket,just

likeanythingelseissoldinamarket.

However,themarketforbusinessesisextremelyilliquid.

Businessesareboughtandsoldonceortwiceinthelifetimeof

thebusinessortheownerofthebusiness,whichcouldbeonce

ortwicein20years,30years,40years,50years.

So,whiletherearealotofbusinessesboughtandsoldevery

year, it's minuscule compared to the total number of

businessesoutthere.

“While there are a lot of businesses bought and sold every year, it's minuscule compared to the total number of businesses out there.”

The Path

17

Asaresult,thisisarareoccasionforabusinessownerorfor

thebusinessitself.You'retalkingaboutsomethingthatdoesn't

happen very often. It's an interesting context under which

you'reoperating.


18

DEMOGRAPHICS AND MARKET

Now let's go through the broad demographics ofwhat's

happeningwiththesaleofbusinessesrightnow.

According to the California Association of Business Brokers,

retiringbabyboomerswillsellorbequeath,meaninggiveto

their heirs, $10 trillion worth of assets over the next two

decades.

That is an incredible amount of wealth that is going to be

changing hands. More than 70% of these companies are

expectedtochangehands.

It is expected, according to the California Association of

Business Brokers, that almost 12million businesseswill be

soldoverthenext10to15years.

Ofprobably12to15millionprivatelyheldbusinessesinthe

United States, 60% are owned by individuals born prior to

1964,meaningbabyboomers.60%of15millionbusinessesis

9 million businesses. So, eventually, all 9 million of these

businesseswillneedtotransitiontonewownershipasbaby

boomersretireormoveon.

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19

Forthesakeofourdiscussion,let'sassumethat50%ofthese

9 million businesses either close the business or pass the

companyontotheirchildren.

Thatleavesastaggering4.5millionthatwillneedtoselltonew

ownersviasomesortofmergeroracquisitioneventinthenext

15years.

“A staggering 4.5 million businesses will need to sell to new owners in

the next 15 years.”


20

THE BABY BOOM GOES ON

Ifyoufollowthemathfromthelastsection,we'retalking

about300,000businesses thatneed to findbuyerseach

yearonaverageoverthenext15years.

Thisisanenormousnumberofbusinessescomparedtohow

manybusinessesarecurrentlychanginghandsandhowmany

businesseshavechangedhandsinthepast.

So, there is definitely a boomhappening in the sale of baby

boomer generation businesses which is only going to

strengthen and increase as more and more boomers are

hanginguptheirsaddlesandcashingintheirchips.

This trend is really just beginning, and it's expected to

acceleratedramaticallyoverthenext10to15years.

BAD NEWS FOR SELLERS Thisisbadnewsforsellerswhoaren’tplanningfortherushof

businesses that will be flooding the market. There is no

correspondingdemographicgrowthinbusinessbuyers.

The Path

21

Yes,privateequityfirmsareincreasinglyactiveinsmallerand

smaller companies and are increasingly dipping down into

what’s known as the lower-middle market to scoop up

companiesdoing$20millionto$50million.

However, we will cover some of the reasons that’s not

necessarilyananswertoyourproblemsalittlebitlater.

“There is definitely a boom happening in the sale of baby boomer generation businesses which is only

going to strengthen.”


22

LACK OF PLANNING

According to a small business study performed by

Securian,which is a lender, 72%ofbusinessownersdo

nothaveaplanforexitingtheirbusiness.

Andthey'renotintheprocessofcreatingaplaneither…that

meansmostbusinessownershaveNOplan.

Only14%ofbusinessownershavea formal exit strategy in

place.Andtheother14%remainingareworkingonaplanbut

mayormaynothaveittogether.

Soreally,there'sonlyasmalluniverseofsellerswhohavetheir

acttogetherwhohaveaplanandwhoaretakingaction,about

14%ofthetotalnumberofbusinessesoutthere.

So,thequestionis,whataretheothersthinkingoraretheyjust

soburieddown in thegrindof thebusiness that they'renot

thinkingaboutituntilit'stoolate?

Theproblemisthat,whentheyaredesperatetosell,they'rein

forashock.

“Only 14% of business owners have a formal exit strategy in place.”

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23

If they didn't set their business up to be sold and they just

weren'tplanningaheadoftime,they'reinforanastysurprise

whentheydecidetheywanttosell.


24

THE OPTIONS FOR THE BUSINESS OWNER

So,whatare theoptions toyouasabusinessowner for

exitingyourbusiness?

Thereareseveraldifferentoptionsthatareprettygood.Let's

sayyouhavea$10millionto$50millionayearbusinessthat

somebodymighthavesomeinterestinowning.

Themainoptionsare:

1. Selltofamily

2. Selltoprivateequity

3. Selltoanindividual

4. Selltoastrategicbuyer

5. DoanESOP(employeestockoptionplan)

6. Sell to your executive management team (MBO -

ManagementBuyout)

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25

OPTION #1: SELL TO FAMILY

The first option is that you could sell to your family or

childrenorjustbasicallyturnthebusinessovertothem

andgiftittothem.

But oftentimes, number one, the bulk of the wealth of the

entrepreneuristiedupinthebusiness,sotheycan'taffordto

justgivethebusinesstotheirkidsortheirfamily.

Maybetheydon'twant to justgive thebusinessawayto the

familyeveniftheycouldaffordit,becausetheyfeelthatmight

turn their kids into spoiled ungrateful brats, because they

didn'thavetoearnitthemselves.

Oryoumayhaveotherreasonsfornotwantingtodothat,even

ifyoucanpotentiallyaffordtodoso.

FUNDING THE PURCHASE Anotherproblemwithsellingtoyourfamilyis,theyprobably

can'taffordtopurchasethebusiness.

“When you're selling a business, you typically want to walk away with about 80% of the purchase price.”


26

Thepointisthat,whenyou'resellingabusiness,youtypically

wanttowalkawaywithabout80%ofthepurchasepriceatthe

closingtable.

Your family, your heirs don't necessarily have the ability to

raisethosefundsorfinancethepurchaseofthebusinessfrom

you,evenifyouweretosellittothematafavorablerateorat

amarketrate.

So,sellingtoyourfamilyandsellingtoyourchildrenisnota

greatoption.

CHANGING TRENDS Andwe didn't evenmention the fact that a lot of times the

childrenofsuccessfulentrepreneursdon'tevenwanttobein

thefamilybusinessinthefirstplace.

That'satrendthat'sdefinitelybeenincreasingoverthelast20

years.Peopleoftendon'twanttogointothefamilybusiness,

whether it's a blue-collar type of business, or awhite-collar

typeofbusiness.

Alotoftimes,thechildrentowanttostrikeoutontheirown

anddotheirownthingortheydon'thavethecapabilityorthe

intelligence or the motivation or the ambition to run the

company.

So,theyarenotnecessarilygoodcandidatesforpurchasingthe

company.

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27

“A lot of times the children of successful entrepreneurs

don't want to be in the family business and there are no obvious buyers around.”


28

OPTION #2: SELL TO PRIVATE EQUITY

Optionnumbertwo,youcouldpotentiallyselltoaprivate

equitygroup.

But, thenumberofbusinesses sold toprivate equity groups

every year is pretty small compared to the total number of

businessesthatareavailableforsale.

So,ifyou'renotafast-growingcompanyoryou'renotinasexy

industryoryou'renotinsomeindustrythataprivateequity

grouphappenstospecializeinacquiringcompaniesin,there's

a very high likelihood that private equity isn't interested in

yourbusiness.

There are only a select fewkinds of businesses that private

equitylikes.

“The best businesses out there may make a lot of money but

aren't attractive to private equity firms for a variety of reasons.”

The Path

29

WHAT PRIVATE EQUITY LOOKS FOR Icoulddoawholebookonwhatprivateequitylooksforina

business,butattheendoftheday,theywantsomethingthat's

growing fast, thatmakes a lot ofmoney and that has some

potentialtobesolddowntheroadforalotmoremoney.

So,ifyourbusinesshasnotbeengrowingquicklyorifyou're

intheconstructionbusinessorinanindustrywhereyoudon't

have recurring revenue from your clients, that's a big black

markagainsttheinterestlevelthatyourbusinesswillobtain.

Thebestbusinessesout theremaymakea lotofmoneybut

aren't attractive to private equity for various reasons. So,

sellingtoprivateequityisnotnecessarilyanoption.

Youmayhavebeenapproachedbyprivateequityfirmsinthe

pastwho've said they're interested inbuyingyourbusiness,

butthat'snotnecessarilyagoodindicatorofwhetherprivate

equitywouldactuallybuyyourbusiness.

“Being approached by private equity firms is not necessarily a good indicator of whether they

would actually buy your business.”


30

Whatcanhappenisthatwhenyougettotheclosingtheysay,

“Oh,well, insteadofgivingyou$6million foryourbusiness,

we'regoingtogiveyou$4millionforyourbusinessbecauseof

X,Y,andZthatwefoundduringtheduediligenceperiod.”

Nowyou'vespentsixmonthsand$150,000,andtheywantyou

totakea$2millionhaircut.That'sthetypeofstuffthatprivate

equitydoes.

So,youneedtobeverycarefulifyou'rethinkingaboutselling

toprivateequityandwhetherthat'sevenagoodoptionforyou

toconsider.

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OPTION #3: SELL TO INDIVIDUALS

Another option for a business owner is to sell to an

individual.

Individuals are typically buyers of smaller companies – the

typesofbusinessesyouseesoldonbizbuysell.comandsimilar.

Ifaretiringcorporateexecutivewantstobuyacouplemillion

dollarayearbusinessorevena$10millionayearbusiness,

theymaybeabletoaffordit,theymaybeabletodoit,butthose

buyersarefranklyfewandfarbetween.

Andthere'snotthatmanythathavethedesire,themotivation

andtheresourcestotakedowna$20millionto$100milliona

year company. So typically selling to an individual is not an

option.

Theideaofentrustingtotalstrangerswithyourentirefinancial

futureis,ifyouthinkaboutit,ratherinsane.Butthat’soften

whatsomeonedoeswhentheyselltoanoutsidebuyer.

“Typically, selling to an individual is not an option because there are

so few individual buyers out there.”


32

OPTION #4: SELL TO A STRATEGIC BUYER

Anotheroptionissellingtoastrategicbuyer.

Thisisabuzzwordandbrokerswilloftentrytoconvinceyou

thattheycanfindastrategicbuyerforyourcompanywhowill

paymuchmorethanwhat'scalledafinancialbuyerforyour

company because they have some strategicway to leverage

yourcompany.

Inmyexperience,moreoftenthannot,strategicbuyersarefew

andfarbetween.

Theyknowhowmuchyourcompany'sworth.Theymaysiton

thesidelinesforawhileandseeifyoucansellyourcompany

ornottoafinancialbuyerandthentheymayswoopinwitha

low price or attempt to buy your company in some other

fashiondowntheroadthroughanassetsaleorliquidation,for

example.

“Brokers will often try to convince you that they can find a strategic buyer

who will pay more for your business. It rarely happens.”

The Path

33

LIMITED OPTION So,astrategicbuyercandefinitelybeagoodoption,depending

onwhatkindofindustryyou'reinandwhatkindofstrategic

advantagesyoucouldoffertoapotentialstrategicbuyer.

Italsodependsonthemakeupofyourindustryandwhether

there'smergersandacquisitionsactivityinyourindustryand

whetherthere'sdemandforyourcompany.

Strategicbuyerscanbeafantastic,veryviableroute.Butmost

companiesarenotabletofindastrategicbuyerandtheyend

up having to sell to a financial buyer or have some other

solution that they have to accept because, frankly, strategic

buyersarefewandfarbetween.

“Strategic buyers can be a fantastic route but they are

few and far between.”


34

OPTION #5: DO AN EMPLOYEE STOCK OWNERSHIP

PROGRAM

Another option is an ESOP,which is an Employee Stock

OwnershipProgramorPlan.

Thisisaveryoften-usedoptionbyownersthathavetriedto

selltheircompany.

It’sagoodoptionforcompaniesthathaveputthemselveson

themarketandspentayear,twoyears,threeyearstryingto

sellthecompanyandhavefailed.

Infailingtosuccessfullysellthecompanyforthevaluationthat

the business ownerwants, oftentimes the ownership group

willimplementanemployeestockownershipprogramwhere

they'reabletosellsomeoralloftheirequityintothecompany.

Thisisthenessentiallypurchasedbythecompanyandgifted

later on to employees through a very complicated and very

costly structure. They cost anywhere from $50,000 to

$100,000ormoretosetup.

LIMITED BENEFITS ESOPscanbeagoodsolutionifyoucan'tfindabuyer.Butthe

problemisthatit'sveryrarethatthebusinessownerwouldbe

abletowalkawaywith80%ofthecashatthepurchaseprice.

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35

Soifyou'reasellerandyouwanttowalkawaywithafistfull

ofmoneyandsailintothesunsetonyouryachtortravelthe

world and not be worried and thinking about whether the

company'sbeingrunwellsothattheycancontinuetobuyback

yourshareseveryyearforthenextfiveorsevenor10years,

thenanESOPiskindofalousyoption.

LOSS OF CONTROL You also lose a lot of control over the company obviously

because you're not the primary owner anymore, but you're

stilloftentimesheavilyfinanciallytiedtothatcompanywhich

younolongercontrol.Sothat'sabitofarisk.

“ESOPs can be a good solution if you can't find any buyers when trying to sell for a reasonable price. Usually the price is just too high because

your expectations are unreal.”


36

TherearesomeplusesandminusestoESOPsandIcanpoint

youinthedirectionofagoodcoupleofcompaniesthathelpset

thesethingsupifthat'ssomethingthatyouwanttodo.

ButbeforeyoudoanESOP,weencourageyoutoexplorewhat

we consider to be the final option, the best option for the

ownerofasuccessful,productive,profitablebusiness,which

wouldbedoingamanagementbuyout.

“With ESOPS, oftentimes you are heavily financially tied to the

company which you no longer control. That's a big risk.”

“The Devil is in the details of an

ESOP.”

The Path

37

OPTION #6: MANAGEMENT BUYOUT

Thefinaloptionwe’lltalkaboutismanagementbuyouts.

A management buyout is a great option, but it is often

somethingthatisveryhardtoactuallypulloff.

A management buyout is where the management team

essentiallydoesabuyoutofthecurrentownershipteam.

Because the management team perhaps doesn't have the

financial ability to borrow enough money, it often involves

bringing in outside capital, both in equity and debt to

essentiallydoaleveragedbuyoutofthecompanyusingoutside

investorsandoutsidelenders.

THE BEST PEOPLE A management buyout is an excellent option because the

peoplewhoarealreadyrunningthecompanyarepotentially

the best peoplewho should be running the company in the

future.


38

Theyknowhowtotakethecompanytothenextlevelprovided

there'sdepthofmanagementandthereisstrongleadership.

Ifyouhaveaweakexecutiveteamthenamanagementbuyout

isaterribleidea.

If youhave a strongmanagement team that operatespretty

independently and could operate pretty independently

withoutyouandeitherkeepthecompanystrongatitscurrent

levelorgrowittothenextlevel,thenamanagementbuyout

couldbeanexcellentoption.

“Your management team who is already running the company is

often the best buyer because they already have the ability to

successfully run the company into the future.”

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39

“The main reason management buyouts are not more commonplace

is the fact that they are tricky to structure and management teams

alone don’t have the MONEY needed to explore and initiate the

process.”


40

OVERVIEW

We've reviewed the variousoptions forbusinessownerson

theirexit:

1. Selltofamily

2. Selltoprivateequity

3. Selltoanindividual

4. Selltoastrategicbuyer

5. DoanESOP(employeestockoptionprogram)

6. Sell to your executive / management team (MBO –

ManagementBuyout)

Now,let’stalkinmoredetailaboutmanagementbuyouts.

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41

WHY MANAGEMENT BUYOUTS ARE ATTRACTIVE

Management Buyouts can be a low-risk tool for

maximizing the sale price of your company, while

reducing the risk of total failure in accomplishing a

successfulandlucrativeexit.

As I’vementioned before, one attraction is that the existing

managementteamareoftenthebestpeopletotakeacompany

forward.

For you as a seller, Management buyouts bring certainty,

confidence, and sanity to an otherwise pretty insane,

expensiveandriskyprocess.

Theyworkequallyforownerswho:

• Have already spent years and tens of thousands of

dollarstryingtoselltheircompanies

• Are just getting started and want to avoid the

nightmare,riskandthehighcostoftrying

Unlike traditional business sales, management buyouts

accomplish the goal of less friction, less likelihood for a re-

traderightbeforeclosing.

Are-tradeiswherethepriceortermschangesuddenlyafter

you’vespenthundredsofthousandsofdollars(andmonthsof


42

your life) and you agree to getting screwed because you’re

tiredandburntoutandjustwanttobedonewithitall.There-

tradeisafavoritetechniqueofprivateequitycompanies.

Ourpartnersoftengethighervaluationsandamuchfasterand

lessstressfulexit.

Ifyoucanfindaninterestedpartnertohelpyoupull itoff,a

managementbuyoutisreallythe“elegantsolution”toexiting

yourbusinessandgettingtopdollar.

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43

SO WHY NOT MORE MANAGEMENT BUYOUTS

(MBOS)?

Whileithasn’tyetbecometotally“mainstream,”moreand

more business owners are turning to the Management

Buyout(MBO)optionasTHEsolutionforexitingquickly

andfortopdollar.

But you might wonder, if it seems like great news for a

companylikeyours,andforretiringbabyboomersingeneral,

whyisn’teveryonedoingit?

• Why don’t more business owners just go ahead sell

theircompanytotheirmanagementteam?

• WhydoesourcompanyMBOExitevenneedtoexist?

LACK OF SKILLS One main reason management buyouts are not more

commonplaceisthefactthattheyaretrickytostructure.

Thereisoftennotenoughknowledgeandabilityonthebehalf

ofthemanagementteamtostructurethecorrectdealandgive

thesellerenoughcashattheclosingtable.


44

LACK OF FINANCE Another big factor is that 99% ofmanagement teams don’t

havetheMONEYtopurchasethecompanyfromthefounders.

Iftheydid,theywouldcertainlypurchasethecompany,buton

theirown,theycan’tpullitoff.

Theydon’thavetheabilitytoborrowtheDEBTrequiredtodo

soeither.

In the past, the seller would have to finance 90% of the

purchaseprice,whichisaterribleandriskypropositionand

doesn’tactuallyresultinafullandcompletesale.

GETTING OUT FAST Ifyou’rewillingtophase-outover7-10years,thismightbea

goodoption,butmostsellerswhoarereadytosellwantOUT

now and they can’t risk the bulk of their net worth on the

changingeconomiccyclesortheirmanagementteam’sability

torunthecompanyprofitablyintheirabsence.

So,mostbusinessownersaretrapped.

“There is often not enough knowledge and ability on the

behalf of the management team to structure the correct deal.”

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45

But,realadvancesinfinancialmarkets,lendingandtaxrules

havemade it increasinglypossibleand realistic toexecutea

ManagementBuyout(MBO).

Whatwedoinourbusinessiswespecializeinworkingwith

themanagementteamtopullthisoffandthenwebecomean

investorinthecompanyalongsidethemanagementteam.

Letmeexplainthatabitmore.


46

HOW A MANAGEMENT BUYOUT WORKS

So,whatdoesatypicalmanagementbuyoutlooklike?

Amanagementbuyoutiswherewearrangeallofthedebtand

equity on behalf of the management team and we invest

alongsidetheminordertogivethecompanysellerupto80%

attheclosingtablewithin4-6monthsofbeginningtheprocess.

It’s10xmorecertainofclosing,it’sabettervaluationforyour

company,andit’sfasterbecauseyou’reworkingwithparties

thatyouknowandtrust.

Typically,whenweassistwithdoingamanagementbuyout:

• Our investment group ends up owning about 80%of

thecompany.

• Themanagementteam,whichyouhaveinplace,ends

upowningabout20%ofthecompany.

“We put into place various types of financing to enable the management

team to acquire the company in partnership with investors.”

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47

We put in place various types of financing to enable the

management team to acquire the equity and we obviously

providethefinancingnecessaryforustoownourshareofthe

equity.

But100%oftheequityisownedbyourselves,ourinvestors

and your management team alongside one another as

partners.

Now, in a management buyout, it's typical that the

management team is able to purchase the company at a

valuationbelowwhatweastheinvestorsarepaying,meaning

we are giving your management team an incredible

opportunitytobuythecompanyatadiscountbecausewewant

them to have skin in the game andwewant to effectuate a

transaction.

Again,we provide all the debt required to themanagement

teamtopurchasetheirportion.

The debt required to purchase their 20% of the equity

ownershipcomesoutofthecashflowofthebusiness,meaning

they're not having to reach into their bank account or their

savingsortheirretirementfundsiftheydon'twanttohavethe

fundscomeoutofpocket.


48

Westructurethingsinsuchawaythatthemanagementteam

does not have to come out of pocket for acquiring the 20%

interestinthecompany,whichisafantasticdeal.

Theymayhavetoguaranteethemoneythatthey'reborrowing

so that theyhavesomeskin in thegameand theydon't just

walkaway.

But we enable the whole transaction to occur without the

management team having to come out of pocket or pay

expensivelegalbillsandfigureoutthewholeprocessofhow

thisactuallyworks.

“We enable the whole transaction to occur without the management team having to come out of pocket or pay

expensive legal bills.”

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49

MANAGEMENT BUYOUT EXAMPLE

Let's takeanexampleofanequipment leasingcompany

thatdoes$50millionayear.

Thesellerisinterestedindoingamanagementbuyoutbecause

she feels like the best buyer of the company would be her

existingmanagementteamwhohavegrownthecompanyfrom

$10millionayearto$50millionayearinthelastfiveyears.

Shewantstorewardthemandwantstoincentivizetheminthe

futureandprovidewealthopportunitiesforhermanagement

team.Thisisreallyalifechangingopportunityforherteam.

Let'ssaythiscompanydoes$50millionayearinrevenue,and

let's say it does 10%margin, so it does $5million in profit,

what they call EBITDA, Earnings Before Interest, Taxes,

Depreciation,Amortization.

Let's say we purchase this company for $20 million, which

would be four times earnings. Let's not worry about the

equipmentandallthatandadjustingfortheassetvalueofthe

company.

REQUIREMENT Wewould typically require that the seller in amanagement

buyout,thatcouldbeyouorsomebodyyouknow,finance20%

ofthepurchasepriceforthreeyears.


50

Sellersgenerallyneverwalkawaywith100%ofthepurchase

priceattheclosingtable.Itjustdoesn'thappen.

Either the seller finances20%of thepurchasepriceor they

havetoretain20%ownershipinthecompanyandthenhavea

buyoutlater.

Alternatively, they may get it, what's called an earn-out,

meaning they only get the remaining 20% of the purchase

priceaftertwoyearsofthecompanybeingstableorgrowing.

Ifyouhavetheexpectationthatyou'rejustgoingtoget100%

ofthepurchasepriceattheclosingtableandjustwalkaway

fromyourcompany,goodluck.Iwishyouwell!

Youcancallmeinayearwhenthatfailsbecausethelikelihood

ofthathappeningisslimtonone.

Itdoeshappenfromtimetotime,butifyou'recountingonit,

youaredeludingyourself.

“Sellers are delusional if they think they can walk away with

100% of the proceeds at closing. It doesn’t happen 99% of the time.”

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51

FINANCING So,assumingsellerfinancingof20%ofthepurchasepricefor

threeyears,thatwouldbea$4millionnote,interestonly,due

inthreeyearsorfiveyearsdependingonwhat'snegotiated.

The remaining 80% of the purchase price, meaning $16

million,hastobefundedatclosing.

Wehelpthemanagementteamcomeupwiththeir20%ofthe

80%,whichis16%or$3.2million.

Weastheinvestorgroupcomeupwiththeremaining80%of

the80%whichis$12.8million.

In total, we help the management team and we ourselves

provide80%ofthepurchaseprice,$16millionatclosing.

So,inthisarrangementatclosing,thesellerwouldwalkaway

with80%ofthepurchaseprice.

Themanagementcompanywouldown20%oftheequity,and

wewouldown80%oftheequity.

Wecantypicallygetthisdoneinthreetofourmonthsifyou

have your act together and dedicate your full time and

attentiontothisprocess.

Ifthat'sunlikely,thenitcouldtakeuptosixmonthsbecause

typically theweight isnoton thebuyerof the company, it's


52

typicallyonthesellerofthecompanynotgettingstuffturned

aroundquicklyenough.

So, if youare interested inamanagementbuyout,wheredo

yougofromhere?

The Path

53

NEXT STEPS

Ifyouareinterestedinamanagementbuyout,here’show

theprocessworks.

Weofferafreeconsultationwherewe'llgiveyousomeadvice,

somestrategies,sharewithyousomeofthethingsthatwe've

doneinthepast,whichincludehowtosellyourcompanyfor

topdollarin90dayswithoutabusinessbroker.

We’llgothroughsomestrategiesfordoingthataswehavean

incentivetonotinvolvebusinessbrokersbecausethat's5%to

15%ofyourcompanythatyoucouldget,orwecouldsplitby

notpayingabusinessbroker.

We will help you see and learn how to shortcut the whole

nightmareofsellingyourcompany,howtoavoidgoingdown

thewrongpathwithagroup.

“We will share strategies to show you how to retire sooner, so you can actually enjoy the wealth

and prosperity you've created.”


54

Wewillsharestrategiestoshowyouhowtoretiresoonerso

youcanactuallyenjoythewealthyou'vecreated.

Wecandiscusswithyouhowtohelpyourmanagementteam

survive once you exit. It’s very important tomake sure that

your management team survives and that your company

survivesafteryouexit.

Therearecertainthingsthatyoucandoandputinplaceduring

thisprocesstoincreasethelikelihoodthatyourmanagement

teammakesitandyourcompanymakesit.We'dbehappyto

sharesomeofthosethingswithyou.

FINDING BUYERS Wewouldalso like togooverwhere to findbuyersyoucan

trust. There are ways to search out players that are more

trustworthythanothers.

Anotherthingworthdiscussingandlookingatandevaluating

ishowtoexitbeforethenextrecession.It'sveryimportantthat

yourtimingisgoodwhensellingabusiness.

It'softenverysmarttosellwhenaneconomyisstrengthening

because itmay take sixmonths andyoudon'twant to start

putting your business on themarket right as a recession is

comingon.And90dayslater,yourbuyergetscoldfeetbecause

they are nervous about the macro or micro economic

conditionsaroundyourbusiness.

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55

So, learning how to time your exit is very important. And

obviouslywe'reinaverystrongeconomyrightnow,soit'sa

very,verygoodtimetoexitbeforethenextrecessioncomes.

AVOIDING BAD DEALS We'llalsosharewithyouhowtoavoidnegotiatingabaddeal.

It's easy tonegotiateabaddeal.And there'smorevariables

thanjustprice.

Sellers often get way too fixated on price and not fixated

enoughonsomeoftheotherminutedetails.

So,we'dbehappytosharewithyousomestrategiesonhowto

avoid negotiating a bad deal if you are in the process of

negotiatingnoworjustwanttobeproactivewhenyoudoput

yourbusinessonthemarket.

I'mhappytosharewithyousomeresourcesforESOPs,these

Employee Stock Ownership Programs or Employee Stock

OwnershipPlans.

“It's very important that your timing with the Economy is

good when selling a business.”


56

Weadvise that youavoid themunless your exit orbusiness

saletotallyfails,inwhichcaseit'sagoodbackupoption.Butit

iscertainlynotwhereIwouldstartifIwassellinga$10million

to$50millionto$100millioncompany.

Anotherthingworthgoingoverisobviouslyhowtosellyour

company without throwing your employees under the bus,

because oftentimes the best sellers feel a very strong

obligation to their employees and providing for their future

andensuringthattheyaretreatedwellpostexit.

So, we’ll go through some strategies of how to sell your

companywithoutdamagingyouremployeesunnecessarily.

PARTNERSHIP What we do ismanagement buyouts, whichmeans that we

partner with proven management teams to provide the

necessary capital to help the management teams buy the

companiesthatthey'realreadyrunning.

“Most sellers feel a very strong obligation to take care of their

employees and ensure that they are well treated post-exit.”

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57

So, we're different from traditional private equity groups

becausewedon'twanttoown100%ofyourcompany.

We want your management team as true partners, not

employees.Andwe'vedonethismanytimes.

Ourinvestmentpartnershavefundeddozensofmanagement

buyouts and helped dozens of entrepreneurs achieve huge

exits.

KEY QUESTIONS Herearesomeofthequestionsthatweanswerduringthisfree

consultation:

• Whataretheexactstepsforexitingyourbusiness?

• Shouldyoudoanassetsaleorastocksaleandwhich

oneisbetter?

• Shouldyouuseaninvestmentbankornot?

• Whatarethetaximplicationsofselling?

• HowdoIweighthevalidityandstrengthofanoffer?

• Howmuchismycompanyactuallyworth?

“We want talented management teams heavily incentivized to make the business successful

now and into the future.”


58

• ShouldIuseanESOP?

• WillmymanagementteamsurvivewhenI'mgone?

• Should Ikeeptherealestateorsell therealestateas

partofthetransaction?

We're happy to do this with you provided you meet the

requirementsasapotentialpartnerforus.

There are these questions and many more that are worth

answeringbeforeyougointothesalesprocessandbeforeyou

engageabroker,andbeforeyoudecidetoputyourbusinessin

themarketornotputyourbusinessonthemarket.

Oncewe'vedonethisinitialfreeconsultationwithyou,wewill

makeadeterminationastothesalabilityofyourbusinessand

whetherwewouldliketocontinueworkingwithyoutohelp

youtodetermine:

1. Howmuchyourcompanyisactuallyworth.

2. Allthestepsthatwouldbeinvolvedwithanexit.

3. Puttingtogetheranexittimelineforyou.

4. Structuring your exit to achieve the maximum value

andthebesttaxsavingsandtaxstructuretogiveyou

themostamountofsaleproceeds.

We don't actually charge for any of the services that we

provide,butweareveryselectiveaboutwhoweworkwith.

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59

We'reinterestedinfindingpartnersandacquiringasignificant

interest in very high-quality companies and getting around

working with business brokers who in our opinion are an

impedimenttodoingsuccessfuldeals.

Whileweareselectiveaboutwhowewillworkwith,wewill

doafreeconsultationwithalmostanyonewhohasabusiness

thatis$10millionto$15millionayear,or$100millionayear,

inthatrange.

Ifyouareinterested,please,seeourwebsiteat:

www.MBOexit.com

Signupforafreeevaluationandwewillgothroughallofthe

issuesthatwerebrieflydiscussedinthisbook.

Call(615)696-7676toscheduleadiscussion.

“We're interested in finding operating partners to acquire significant interest

in very high-quality companies.”


60

ABOUT THE AUTHOR

StephenEpstein

(615)696-7676

After completing over $300Mof real estate acquisitions

forGrosvenor, theDukeofWestminster'sprivateequity

realestatefund,StephenEpsteinhasbuilt,grownandran

severalcompaniesinindustriesrangingfromtrainingand

publishingtoconstructionandmanufacturing.

Today,he isthemanageroftheRéalisteprivateequityfund,

focusedon theacquisition, constructionanddevelopmentof

realestateinNashville.

Epstein founded MBO Exit, as a solution for the growing

number of entrepreneurs looking to sell their companies

quicklyandfortopdollar.

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61

InpartnershipwithYorksteinAcquisitionGroupandNational

Diversified Funding Corporation, Epstein has the ability to

secure debt and equity for Management Buyout (MBO)

transactionsthatmakesense.

Through a network of capital providers, Epstein’s

methodology allows for management teams to successfully

acquiremeaningfulequitystakesintheircompanieswithout

havingtocome“out-of-pocket”todoso.


62

ABOUT MBO EXIT

MBOExitworkswith theownersandmanagement teamsof

companies grossing between $20m and $100m per year, in

order to help them facilitate the sale of their companies

withoutexcessriskorsellerfinancingbytheexistingowners.

MBO Exit acts as a financial partner and investor alongside

managementteamstohelpthemstructure,finance,andfund

theacquisitionofthecompaniesthey’realreadyrunning.

Ourinvestmentpartnershavefundeddozensofmanagement

buyoutsandweprovidealloftheneededdebtandequityto

acquireacompany,including100%financingfortheportion

ofthecompanybeingacquiredbythemanagement,sothere

arenoout-of-pocketcoststothemanagementteam.

We look for excellent companieswith long track records of

profitability,strongdepthofmanagement,andabrightfuture

ahead.

As a partner and investor, we provide assistance with long

range strategic planning, help refine sales and marketing

efforts,andlooktomassivelygrowthebusinessthroughthe

establishmentofanentiremergersandacquisitionsdivision

forthecompany.Thisdivisionisusedtoacquirecompetitors

and complimentary businesses that can further boost the

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63

bottom line,making the companymoreprofitableandmore

competitive. It also provides excellent career advancement

opportunitiesfortalentedmanagers,asthe“game”getsbigger

andbigger,aswellastheirfinancialrewards.

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