Non-Sponsored Management Buyout Experience
Lantern Capital Advisors experience encompasses helping managers and minority shareholders execute non-sponsored buyouts that realize control of the business while allowing them to create significant value.
Non-Sponsored Management Buyouts
For financially healthy businesses, there is another approach that utilizes the same financing techniques but MANAGEMENT gains operating control. In fact, management can end up owning 85% to 100% of the Company depending on the situation. These types of buyouts are called Non-Sponsored Leveraged Buyouts, and it’s they type of buyout transaction that Lantern Capital Advisors specializes in helping owners and managers execute.
An ideal situation is for the buyer(s) to already be running a profitable business. Common situations would be a CEO that buys a company from a passive owner or a limited partner buying out his or her majority partner(s). The key is for would-be lenders or investors to have confidence in the management team once the owner walks out the door. [The process for completing a non-sponsored management buyout is pretty much like any other business financing. The key requirements for a successful management buyout process are a quality team, proactive management, and agreement on purchase price.
Many prospective buyers never ask for the opportunity to buy their owner’s business or buyout a partner. Many are reluctant because they are unfamiliar with the process or believe they can’t qualify for financing. Interestingly, it’s the financials of the company, not the individuals that drive the ability to perform a non-sponsored buyout. The best way to start such discussions is to informally ask if the owner is open to discussing it. Once you get a ‘yes’ (even a tentative ‘yes’), more homework can begin.
Agreeing on a purchase price can be as complicated or as simple as both parties want to make it. Still, most small to mid-sized companies are valued at a multiple of between 4 to 7 times cash flow (commonly called ‘EBITDA’ – for earnings before interest, taxes, depreciation and amortization). As an example a company that makes $2 million a year EBTIDA could be worth $10 million at a 5 multiple (5X). Knowing this, the most direct way to get a price is to ask the owner their price. A purchase price within a 4 to 7 range of EBITDA will probably work. In fact, our experience has shown buyers will end up owning more through a non-sponsored buyout than a sponsored buyout even if they have to overpay some in order to buy the company.
Most companies know they can get debt from banks and equity from buyout funds. However, a there are a variety of lesser known funding sources such as subordinated debt lenders, insurance companies, corporate development companies, hedge funds and other specialty lenders that will lend beyond a traditional bank. These are the same institutions that buyout firms use to fund their acquisitions. Depending on the economic climate, many of these institutions will lend up to and sometimes over 4 times cash flow (EBITDA).
Should the financing fall short of what is desired by the owner, management and the owner can still execute the transaction, but the owner may retain a portion of the business until their “equity” is repaid. Following the math here, if a buyer purchases a company for $10Million (5X EBITDA) and can borrow $8Million (4X EBITDA) they end up owning 80% of the Company, and the Seller would retain a portion of the company, but their piece would become “the equity”. Owners are satisfied because they get a majority of their cash up front with no recourse. Buyers like it because they get control either upon the initial buyout, or as the equity is paid out to the seller over time. The Seller can be repaid over a period of time (decreasing their ownership over time). Also, most of these specialty lenders do not require personal guarantees limiting the downside risk to new owners. Over time the owner’s remaining interest can be bought out, often at a higher valuation. Most important, the value to all parties is directly driven by the buyer’s performance rather than financial engineering by outside investors.
Non-Sponsored Buyouts: Working With Lantern Capital Advisors
Lantern Capital Advisors helps management and minority shareholders execute leveraged and management buyouts that realize control of the business while allowing them to create significant value.
Management Buyout Financing and Non-Sponsored Management Buyouts
Lantern’s clients are companies that typically have the need to raise capital, complete a business plan, or understand their financial strategy or financing alternatives for one of the following reasons:
- Buying Out A Business Partner or Owner
- The Company Has Become An Acquisition Target
- Growth Capital Financing
- Acquisition Financing
- Corporate Debt Refinancing
- Banks Requests Your Business Plan
- Owner Liquidity
- Investment Banking Alternative
- Initial Public Offerings / Going Public
- Middle Market Divestitures
- Non-Sponsored Management Buyouts