Business owners spend many years
working hard to build their companies, and the reward can often be a big future payout. However, there are
precautionary steps to take when a previous owner looks to buy back his or her
company.
“Don’t go repurchase your former business just because you feel guilty or you
want to save jobs; do it because it’s a
good investment,” says Michael P. O’Neil,
a partner with Taft Stettinius & Hollister
LLP.
Smart Business spoke with O’Neil
about all the considerations former business owners should look at when jumping back in the driver’s seat of their old
companies.
Is now a good time for someone to consider
buying back his or her business?
It’s a great time to buy back your former
business, as long as you still have the fire
in your belly. If you are the former business owner, hopefully you got cash from
the earlier sale of that business, but
sometimes the owner might still be holding an ‘earn-out’ note. The ideal situation
for a reacquisition is one where the business is still viable but there’s just too
must debt on the balance sheet stemming
from the earlier sale.
Why do you think a business that changed
hands in the last few years might be for sale
again?
Remember, many of these transactions
were done in the context of very inexpensive debt financing and oftentimes with
competing bidders. So the prices paid for
companies just two years ago reflect earnings before interest, taxes, depreciation
and amortization (EBITDA) multiples that
now seem quite foreign. The good news
for the prior owner is the acquisition debt
may be maturing soon or even in default
now; the bad news is, while the prior
owner may get a good price on the business today, many lenders are feeling
defensive and only making conservative
loans, so proportionately more equity will
be required for the repurchase.
Can you give an example of this EBITDA
change?
Let’s say you sold your boat and RV
component manufacturing business in
2006 for $42 million, representing a six-time multiple of the company’s $7 million
EBITDA. Now, in 2008, with the boat and
RV market down, that business might
only have $3 to $4 million of EBITDA and,
with a four-time multiple, you could buy it
back for $12 to $16 million. The company
still makes money, just not enough to
service the $20-plus million in debt now
on its balance sheet.
What kind of strategies can be used to buy
the business back at a good price?
Depending on the company’s size, there
is often a business broker or investment
banker involved in orchestrating the sale.
Usually, that middleman contacts the former owner as well as competitors, strategic buyers and other prospects. The former owner might consider buying all or a
portion of the outstanding bank debt or
mezzanine debt and employ a ‘loan to own’ strategy. Depending on the lender’s
mindset, sometimes debt can be purchased at a discount to par, but the full
face amount of the debt can then be used
as ‘currency’ for the repurchase.
What kind of strategies can be used to stabilize the company in an economic downturn?
A company in the valley of a micro- or
macro-economic cycle may need to take
tough steps such as shutting down product lines or even entire plants, reducing
head count, etc. Frankly, the former
owner may prefer that the current owner
implement those cost-saving measures
before he or she buys back the business.
Is it wise for the buyer to leverage his or her
financial standing to obtain financing if the
company now has less than stellar credit?
The answer hinges on two factors: (1)
Does the company have a steady stream
of earnings that can support a certain
level of debt funding, and (2) How much
capital is the former owner willing to put
at risk? In the example above, the former
owner might have to put up 25 to 50 percent equity as part of that $12 to $16 million repurchase price, but, of course,
everything is negotiable. Also, the stock
market probably hasn’t done the former
owner any favors lately, and he or she
might conclude the business provides a
potential for above-market returns going
forward.
Any other words of wisdom for the former
business owner?
Don’t go repurchase your former business for all of the wrong reasons; do it
because it makes good business sense.
And, don’t jump back in without talking
to your spouse first!
MICHAEL P. O’NEIL is a partner with Taft Stettinius & Hollister LLP in Indianapolis who focuses on all aspects of business workouts
and insolvency law. Reach him at (317) 713-3500 or [email protected].
