Investing in a business is a lot of work and responsibility. Although it’s amazing to see your company grow, at one point or another you may be ready to sell your share of the company. Usually when an investor wants to sell their ownership in a company, it’s because they see an opportunity in another company. When this happens, the owner will need a business exit strategy. An exit strategy gives the owner a way to liquidate their stakes in a business, but if the business is successful in the future, they can still make a profit. There are different strategies that the investor can choose from, including outside sale, initial public offering, transfer to family, and even management buyout. All of these options have advantages and disadvantages, but this article focuses on management buyout. (Related topics: New York real estate attorney, New York real estate lawyer)
Management buyout is when a company’s existing managers acquire a part, or all, of the company. Occasionally, the management buyers will use the companies assets to finance the purchase, which is called leveraged management buyout. Now that we know what management buyout is, let’s discuss the pros and cons of this transaction.
This arrangement is easy, and the business owner won’t have to take time and money to market their company. Since the managers already have knowledge of the business, it makes this transition easy. They already have the confidence of the customers and any sensitive company details can remain confidential, rather than going to a third party.
Even with leveraged management buyout, the management team often has trouble funding this transaction. This means that they usually have to ask banks for loans, therefore acquiring a significant amount of debt at the beginning of their investment. There are also some trading risks involved. There have been cases of managers intentionally reducing the companies profitability to reduce the purchasing price.
As with all of the exit strategy options, there are advantages and disadvantages. If you’re planning on using an exit strategy, make sure to consult your real estate lawyer in NYC before making a decision.