The Biggest Mistake Ever Made by a Business Manager: Don’t Write Yourself Off as a Buyer So Quickly
I get to meet all kinds of great managers. Some of them own the business that they are running and others do not. There often comes a time when the non-business owning manager needs to take charge of his or her future and I have realized that not many of them know how to do it. As an investment banker, there is nothing worse than seeing someone pass up an opportunity that could have been life changing. Worse, is when they pass it up and you know that in return they will probably lose their job. I wish I could say that I’ve only seen this happen once, but that’s not the case. Don’t be this person. If you manage a business that you don’t own, you owe it to yourself to consult with an investment banker and think about your ability to buy the business you have grown.
The Biggest Mistake Ever Made by a Business Manager
Brad is an enthusiastic manager and natural leader. Ever since our first meeting in 2007, you knew he had a real passion for his business. He had recently been recruited to run this business for two absentee owners who had bought the business as an investment, but only came back from Florida for board meetings. The owners didn’t have any interest in running the business, but they recruited Brad and he was great at it. Brad had recently moved manufacturing locations, which was tough for production, but he managed through it. He had added new customers and improved the sales function.
Then 2008 happened and sales ground to a halt. Like a pro, Brad right-sized the business and started to develop new relationships that didn’t require such long sales cycles. When I visited Brad at the end of 2008, the business had stabilized. By the beginning of 2009, the business was beginning to rebound. It was at this point that I began to discuss with Brad a management buyout. Brad had clearly created value for the business owners and I thought he should at least express his interest in buying the company to the absentee owners.
Now Here’s Where Most Managers Stumble:
1. They Think That They Personally Need to Find Millions of Dollars to Buy the Business
False. There is a LOT of money available to help a manager buy a business, especially when that manager has grown the business and is committed to the future. We will find you the money to make it happen. This may seem like the scary part, but in reality it can be a way for you to create equity in the business while only having to put a small amount of your own capital into the transaction.
2. They Talk to One Buddy Who Is in Private Equity
Bad Idea. You really need someone to manage several relationships in this situation. Not just one. If you only go to one group, you may think you have financial backing to buy the business and mention it to the owners, but if that group backs away you have nothing to fall back on. You need an investment banker to manage several of these relationships to make sure you are going down the right path with the right group.
And the Biggest Area Where Managers Really Fall Apart is…
3. They Believe That The Owners Will Think That they Are Disloyal
They Won’t If You Position It Correctly. There is nothing disloyal about asking to buy the business that you have grown and nurtured. You aren’t asking the owner to give the business to you, you are asking them to sell it to you for a real, market based price. And if you think that they will want to sell it in the near future, having this conversation with them might even be a relief.
And here’s where our story begins to become sad. Brad believed that the business owners would react badly if he asked to buy the business. In 2016, after seven years of outstanding performance and growth by Brad, the owners sold the business to a strategic buyer. Brad was asked to participate in the due diligence of the sale process and was even promised a transaction bonus, but we all knew what the outcome would be. A strategic buyer in the same industry as Brad, had no use for two CEOs. Brad’s time at the company, that he so skillfully grew for the benefit of the owners, was limited and he was going to receive nothing that even came close to an equity-like return.
If you are in a situation similar to Brad’s, have a conversation with an investment banker. As a manager that has devoted many years to creating value for owners, you should be given the opportunity to try to purchase the business. Business savvy owners should not see this as a manager being disloyal. Instead, they should see a manager that is willing to devote resources, personal risk and time into continuing to grow the business.