There are myriad reasons for which you might be considering the sale of your business. Unpredictable market movements may have you concerned for the long-term viability of your existing model, or you may be looking to fund a new venture in a new environment. Alternatively, you may simply have enjoyed a long career in your industry, and may be looking to fund your retirement through the sale of your business to a newer generation.
The sale of a business is functionally simple, but nonetheless a multifarious endeavour. There are also a number of different kinds of bid you may experience when it comes to buyers. It is in your best interest to prepare accordingly, and equip yourself with the information to consider each offer on its merits.
Here, we will be focusing on a specific kind of business purchase: the buy out. What constitutes a buy out, what are the different kinds of buy out, and what are their advantages and weaknesses?
What is a Buy Out?
A buy out is a simple form of business purchase, in which a buyer acquires a controlling stake of a business’ equity. This is usually done through petition to a business’ board of directors, and the co-ordinated sale of shares and debt as a package to the buy out team in question. Buy outs typically occur where a business is undervalued, or displays opportunities for growth. There are two principal kinds of buy out: the management buy out, and the leveraged buy out.
Management Buy Out
A management buy out occurs when a business’ existing management team bid to purchase a controlling stake in a business. The management team in question co-ordinate their finances and strategy to assume control of the business, from a place of experience and intimate knowledge of the business in question.
Leveraged Buy Out
A leveraged buy out occurs when a buyer utilises loan-based financing to acquire a controlling stake in a business. The business’ future success is used to offset the cost of the loan, and lowers the cost of entry for would-be acquirers – consequently, lowering the risk of losing liquid assets to a sale.
The Advantages and Disadvantages
Agreeing to a buy out, over a more conventional bidding process for the sale of a business, can be beneficial for the future of the business – especially where management buy outs are concerned. If you wish to stay on as an advisor or minority stakeholder, or even if you have a personal attachment to the business you have grown, handing over to a management team can be the best way to ensure your business remains in competent and sympathetic hands.
However, buy outs can also inspire existing personnel to move on or retire themselves, especially where a new majority stakeholder heralds systemic changes to the business in question.
Ingrid Maldine is a business writer, editor and management consultant with extensive experience writing and consulting for both start-ups and long established companies. She has ten years management and leadership experience gained at BSkyB in London and Viva Travel Guides in Quito, Ecuador, giving her a depth of insight into innovation in international business. With an MBA from the University of Hull and many years of experience running her own business consultancy, Ingrid’s background allows her to connect with a diverse range of clients, including cutting edge technology and web-based start-ups but also multinationals in need of assistance. Ingrid has played a defining role in shaping organizational strategy for a wide range of different organizations, including for-profit, NGOs and charities. Ingrid has also served on the Board of Directors for the South American Explorers Club in Quito, Ecuador.
