The Transitional Beauty of a Management Buyout

Ownership changes can be a rocky road for companies, particularly for privately held, middle market companies. Most owners are charismatic leaders who have developed a faithful following of employees. The Company’s success springs from the employees’ commitment to the vision of the owner. The company culture is the fabric of experience that binds the employee to this vision. Culture and employee commitment are two very important keys to long term success.

Yet many buyers, be they private equity funds or independent sponsors, often overlook these critical pieces. Rather than see the business in a holistic organizational light, these buyers view it through a financial or operational lens. While they may perfectly analyze the working capital and EBITDA, they may completely miss how the key employees feel about the owner leaving and the immutable impact this has on company culture.

When high purchase prices are paid, new owners need growth to achieve an acceptable IRR. The motivation level of the remaining employees can make or break these growth targets. Lack of employee commitment does not immediately show up in the numbers in a readily discernible way. It spreads slowly but ultimately saps the enthusiasm level of the team in pursuing grand growth strategies. Management buyouts are the perfect antidote to an ownership change-induced employee commitment problem.

How Management Buyout Works

In a management buyout, the management team acquires the business from the owner, and usually continues the cultural legacy of the owner. All the key managers remain in place and the change in ownership is seamless in the eyes of the employees and customers. The newly empowered ownership group launches a new scale-up plan, which is likely an extension of a previously proposed idea.

Company culture may change ever so slightly in a management buyout, but employees will remain committed to the long-term vision. Employee concerns about job security usually dissipate, leading to employee contentment. While management may have new ideas about productivity and accountability, employees usually jump on board due to their senior management trust and familiarity. Due to this transitional ease, management buyouts are a superior way to transfer ownership and to ensure business continuity.