InSight

Exit and Growth Strategies for Middle Market Businesses

Management Buyouts: An Optimal Investment and Exit Alternative

By JP Balestrieri | Sep 21, 2009

Middle Market investment banking activities felt the effects of the financial crisis.  M&A deal volume for the middle market fell 39 percent in 2008 compared to 2007 and has fallen even further into 2009.  The harsh credit markets have left their mark on the middle market.  The average deal value in Q1 2009 was $64.1 million, down from $93.4 million in the fourth quarter of 2007.  The decrease in average deal size can be accredited to conservative valuations due to the added risk and limited debt funds available.  The incentive for an owner or principals to sell their business has sharply decreased and left many waiting for a more optimal, but indefinite exit timeline.

Traditional business models and financial investments have lost effectiveness, allowing a higher demand for alternative strategies and investments.  Private Equity groups are tentative to invest because of the risk coupled with difficultly accessing debt to leverage the scale of their investments.  An alternative investment like a Management Buyout (MBO) presents an appealing opportunity to private equity. Why?
First, the “baby boomer” generation is reaching their retirement age and ripe for an exit strategy with a structure that creates choices for owners. Second, investing in the current management team to take ownership allows for a familiar and friendly transition, and in turn a more reliable and sustainable future for the company. Lastly, the trends in buyout valuation, debt capital, and equity capital are all enablers of MBOs for owners who want to control their destiny at the times they wish to exit, as well as the values at which they prefer to monetize their business’ value.

Baby Boomers make up 28 percent of the US population and 77 percent of the financial assets in the US are controlled by the baby boomers.  Baby boomers in ownership do not have to conform to company retirement regulations and plans, so they are free to retire when they desire, most likely sooner rather than later in this current environment. However, retirement in the current marketplace is more uncertain than it has been in the past. Asset management firms investing in “safe and reliable” stock and bond portfolios have historically managed typical retirement funds. USA Today reported in October 2008 that retirement portfolios have lost 2 trillion dollars (20%) in value, and that workers are beginning to withdraw funds from retirement accounts in fear of more losses.

An MBO provides a comfortable alternative exit strategy because of the secure financial gains heading into retirement and the comfort and familiarity of passing the company reigns to the current management team. Creating a greater level of certainty is mutually valuable to both private equity investors and owners wishing to exit at the values they desire for retirement.  For all owners, it is not only a question of price when selling your business, but also about structure of the terms agreed, which are more optimum in an MBO transaction, given the familiarity with the risks and the upside of the target company between seller and management/owner.  It is very valuable to discuss your options on the value and structure one can achieve in this market via an MBO transaction opportunity.

posted by Gianpiero (JP) Balestrieri


Leave a Comment