Five Strategies to Assist You in Acquiring the Company from Your Boss

“If only I were the boss” is an age-old daydream. Today, more than ever, many employees are transforming their daydreams into reality, with their boss frequently footing the bill. This is referred to as a “leveraged buyout,” and it may work for you.

The business press frequently features stories about employees, unions, and or key management groups purchasing their companies. Typically, such a story indicates that the new owners took on significant debt to finance the acquisition and used the business assets to secure their debt. That is what appears in the newspapers, but structuring a successful leveraged buyout can be challenging, and the diligence with which the deal is prepared frequently means the difference between financial success and financial ruin.

How to create a successful action plan: To begin, take a hard look at the business. Could you really do as well as, or better than, the current leader if you WERE THE BOSS? Create a written record of your thoughts and arguments. Be tenacious. Make a plan and document it. Forecast future sales and earnings for the company’s existing products services over the next five years. While the business may have significant assets (land, buildings, equipment, patents, people, and contracts), without a viable market strategy, it will fail.

Then, consider whether there are any new growth opportunities within the capital structure (debt plus equity) of the company you lead over the next five years. Increase your initial projections by including these sales and cost figures. Take a look at your new profit numbers. Bear in mind that things typically cost more and businesses earn less than you believe, at least in the short term — this is referred to as the start-up period. Allow yourself some breathing room and leeway.

Now take a step back and take another objective look at the business, this time focusing on asset valuation. This begins your due diligence, and even if you have worked for the company, it is critical to complete each step. Solicit permission from the owner to examine tax returns, financial statements, and other company documents. Assemble a team of accountants, attorneys, and other advisors. Additionally, communicate with vendors, customers, and other employees. Conduct a search for industry standards and statistical data. If something does not make sense or appears to be different under this close examination, request additional information. Purchasing any business, particularly one in close proximity, is similar to purchasing an older home; you know there are skeletons and creaks, and while some are cute and livable, others could be deadly.

Environmental concerns, for example, are gaining traction and cannot be overlooked. Your financial institution will almost certainly require an environmental assessment of any property you purchase, and if there is a problem, it could have a significant impact on the transaction. In one instance, I witnessed a situation in which the seller’s profit was wiped out and some of the costs were actually passed on to the buyer.

Once you are satisfied that you have the correct information about a business, perform several valuation calculations to determine its value. Certain companies appear to sell at a multiple of earnings, while others sell at asset value plus goodwill, while still others sell at a significant premium to valuation figures. There is no single correct value for any business. Calculating how much to pay and on what terms is critical to safeguarding your future. That is when the often difficult task of negotiating the purchase begins.

When purchasing a business, I always advise clients to prioritize terms over price. I was able to negotiate a deal several years ago in which the seller and internal buyers held diametrically opposed views on the value of the company. We were able to structure the deal in such a way that the net present value of the agreement equaled what the buyer desired to pay, but the total dollar amount of the selling price plus interest exceeded the seller’s initial request. Compensation and benefits were equalized during the five-year transition period between the old and new owners, and one of the new owners assumed the presidency in the third year. Negotiating gently and being flexible on terms resulted in a very successful transition.

Once you have landed the deal of your dreams, how are you going to pay for it? There are numerous methods for financing an acquisition, and a leveraged buyout is no exception. A partial list includes the following: your personal worth and credit, as well as the worth and credit of your fellow buyers, family, and friends; banks; state and federal loan and grant programs; and professional investors and venture capitalists. Utilize these sources to supplement the portion of the purchase price provided by the acquiring business and the sellers themselves. Putting together the appropriate financial package can mean the difference between success and failure over time. Allow between two and six months to identify and secure funding sources.

After all of this work, you still have not purchased a business. Indeed, it will not be yours until the transaction is completed. Therefore, proceed with caution, as many deals fall apart during or just prior to the closing session.

Once the deal is signed and sealed, you must fulfill your obligations. You are now the business’s proud owner. Your former boss is exonerated. You have seized the opportunity and established yourself as an entrepreneur. You have bills to pay and employees to remunerate. You need to deliver products and or services. Additionally, you have approached the endeavor with a no-nonsense business mindset, which should help increase your chances of success. The “buck” has now been passed to you. It is a wonderful sensation, and if it is in your blood, the sensation will linger for years. Best wishes and good fortune — you are now the boss.

16 thoughts on “Five Strategies to Assist You in Acquiring the Company from Your Boss”

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