Does a Management Buyout (MBO) Make Sense When I Sell My Label Business?
Rock, my kids have all graduated from college. Growing up, they each worked in my label business and seemed to enjoy it. I thought at least one of them would want to return and potentially take it over or buy it from me someday. They don’t. I’m not heartbroken, but it changes how my wife and I plan for retirement. I always envisioned puttering around in my business while someone else ran it. My wife thinks I should traIn the managers to run it, with the option to buy me out. I’ll be 62 this year. It seems like a good time to start the exit process, with a five-year approach of working alongside my managers before exiting on a consulting basis. What do you think?
You and your wife are working together on the plan to sell or exit from your label business. Perfect! She knows you well, where your blind spots are, and where you might allow ego and sentimentality to get in the way of making the right decision.
My column for Label and Narrow Web magazine, Avoiding the Traps in a Management Buyout, digs into the pros and cons of management buyouts (MBOs) for graphic arts companies.
Let’s look at a few areas as you research how realistic it is to sell your label business to your managers.
WEALTH MANAGEMENT
Can you afford to exit the business at the point you envision, age 67? Talk to your wealth advisor and do the math. Can you structure something that brings you regular income? Your idea of continuing on a consulting basis could do that, but often there’s a point where both sellers and buyers are ready to end that arrangement. Is there real estate you can lease them? If you had a 10-year lease with an option to purchase, that would put you at age 77, which is still reasonably young. In my opinion, you’ll need another income source in addition to Social Security, which is why mapping this out is vital.
TIMELINE
Does your wife co-own the business? I’d like to see you and your wife each receive a monthly payment from the business sale. If your children were running the company, you and your wife would each have a salary and a profit share – probably until your deaths. Not having family members running the business changes your future income.
MANAGERIAL READINESS
In my LNW article, I talk about the importance of thoroughly training your managers to be ready to run the business. As a team, they should understand the financial side of the business, plus operations, sales, logistics, HR, and marketing. Train them as much as possible and then bring in a trainer or send them to a program. The business world has changed in the last 40 years since you were a pup. They need to learn from others and get a broad perspective to be strong enough to lead the company.
EMPLOYEES
Do your employees respect these managers? Will everyone pull together to help them succeed? Work on this in your remaining time.
FINANCING THE DEAL
Structuring the deal is critical to discuss with your wife and advisor. You want to understand the financial ramifications and risks of financing all or part of the deal. You must look at all sides, including the possibility that your managers are unsuccessful at running the business. An experienced advisory team such as LaManna Consulting Group can help you weigh these factors.
OTHER BUYERS
As you meet with your advisor, look at other buyers who might be equal to or better at carrying on your type of business. Many buyers in the graphic arts industry would be open and interested in having you continue in some role – either on a salaried or consulting basis – if that’s what you desire. Just because a management buyout seems like an easy answer, do evaluate all your options.
VALUATION
Start the process with a business valuation to understand where you are and want to be. An LCG valuation includes a calculation of your current value, a summary of your strengths and weaknesses, and a list f our top recommendations. With a five-year horizon, you can work on improving the value of your business and, thus, the standing of your future wealth.
DECISIONS
Having your managers succeed you is a big decision. I recommend downloading my free report, Succession Planning Simplified, and discussing it with your wife and confidential business advisor.
Please contact me if you want me to meet with you and your wife. You are wise to begin planning your exit now.