Buyout

The Insider’s Guide to Buying Your Own Company

Buyout

Author: Rick Rickertsen , Robert E. Gunther
Pub Date: 2007
Your Price: $24.95
ISBN: 0814406262
Format: Hardcover

 


A Conversation with Rick Rickertsen, author of BUYOUT:The Insider’s Guide to Buying Your Own Company

What resources are available for managers who are interested in buying out a company?

Surprisingly, almost none. There are no comprehensive resources for managers interested in pursuing MBOs. Books exist on finance issues, writing business plans and raising venture capital, but there has been no complete source, until now, on the management buyout world.

In writing BUYOUT, did you rely solely on your own experiences or did you tap into the resources of your fellow venture capitalists?

The book represents the total of what I’ve learned during fifteen years in the buyout, venture and investment banking worlds. Many of the lessons build upon discussions I’ve had with other investors, discussing war stories, but all the case studies in the book are based upon my direct experiences.

You focus on a few deals in which you were personally involved. What was it about these buyouts that made you choose to document them?

I chose these deals for three reasons. First, there’s a lot to learn from each of the case studies. I write about my best deal and my worst deal and some in between. All have elements that provide lessons for managers and investors. Second, these were all situations to which I was very close and I knew the players well. Third, the managers of each deal are all unique and have different motivations and styles which lead to varied stories. Gillis, McCreery, Hoover and Ceramic City are all interesting studies.

What would you say to fellow venture capitalists who might accuse you of giving away trade secrets?

Two things. First, and most important, I’d say that empowering managers to lead buyouts is only good for our industry. In effect, inspiring managers to lead deals creates more demand for deals, which creates more opportunities for buyout investors. I’m trying to stimulate demand. In most deals, the managers will still need a buyout firm to back them, so it’s good for all parties. Second, in an information age with the expansive dissemination capabilities of the Internet, all these tools will be available to all parties sooner or later. I’ve just bundled them all up for people today.

People tend to think of venture capital as a big-money business. Is your book aimed only at managers of large, highly valued businesses?

Not at all. A buyout can be done on a million-dollar retailer or a simple McDonald’s franchise. The tools applied in a billion-dollar deal are the same as those applied in a $500,000 deal. It’s only the number of zeroes that changes. I recently spoke at Wharton, where I met a man named Frank Auer who is trying to buy out his partners in a $6 million company. He found the book extremely helpful.

Describe the manager who is ideal for leading a buyout.

The ideal manager has a successful record, has led an operating unit of a company and has the skills to manage a business. Managers with this background and the risk profile to go out there, lead their own buyout and be the place where the buck stops are the perfect buyout leaders.

Are there certain managers who shouldn’t attempt a buyout?

Any successful and bold manager can lead a buyout. However, leading one is always risky, time-consuming, challenging and expensive and is not for the faint of heart. Do a courage check before you launch into it to be sure you’re ready to fight the whole war.

In what ways are management buyouts preferable to buyouts by strategic investors?

Management buyouts are great because it’s the internal management team that runs the company, not some large parent company. The managers get to set their own course and tone of conduct. It’s very exciting. Just as important is the fact that in an MBO the managers get a large equity stake which can become very valuable if the company is successful.

What can managers do to make themselves look more attractive to investors?

This is an important point on which managers cannot make mistakes. First, they must be credible, with a record of success and goals that are consistent with their past performance. If they’ve run a $10 million company in the past in the automotive industry, they should not try to buy a $100 million textile company. That’s just not credible. Make the plan fit your skills. Second, and perhaps most important, under-promise and over-deliver. Lots of managers want to “wow” the buyout folks with big promises. That will only hurt because you will inevitably fall short. Do what you say you will do. Walk the walk. And do the small things right. Return phone calls promptly. If you say you’ll do something by Friday, get it done on time and be courteous.

Are there ever investors with bad intentions or methods?

Unfortunately, some investors have developed negative reputations. They probably fall into two categories; those with “attitude” who treat managers and outsiders in a condescending way and those who “retrade” deals, meaning they change their deals when they have the leverage to do so. As a manager, you must protect yourself by doing lots of homework. Spend significant time with your buyout partners. Drink wine or play golf with them to explore their character. And do lots of reference checks on them, just as they will do on you. Call a manager they fired. If they don’t want to give you their references openly, you probably don’t want to be partners with them. Buyouts are like marriages, so be careful.

How can managers learn to protect themselves in the same way as investors?

In addition to the reference checking mentioned above and getting a good feel for your investors, be sure you have an excellent lawyer who has extensive experience in the deal world. Don’t have your brother-in-law Bob, the expert divorce lawyer, do your deal documents. Get an experienced, high quality securities lawyer to do the documents for you so you can be protected. They’re expensive but worth it.

What is the worst deal you’ve ever encountered?

My Ceramic City deal, recounted in gory detail in the book, was a real beauty! Featuring a conflicted and paranoid CEO, duped accountants, falsified financials and inventory records and more, this truly was the deal from hell.

“Venture capital,” “equity” and “IPO” have become household words, mainly because of the attention e-commerce has drawn. Has this hype attracted more candidates to buyouts?

Yes. The tech stock craze of 1999 and early 2000 turned everyone into an investor. Stock options have become ubiquitous in corporate America and everyone has a piece of the rock. Now, the collapse of the dot.com world has prompted equity-oriented managers to flee from e-commerce and come back to the MBO, which gets you the ultimate piece of the rock. MBOs are now hotter than ever.

You stress the importance of not getting caught up in IPO fever. Many managers must come to you with an IPO goal. When are IPOs appropriate?

An IPO can be an excellent financing vehicle if: 1) your company has an exciting and unusual growth story which will be attractive to institutional investors, 2) you can obtain much higher equity valuations in the public market than in the private market, and 3) you have a strategic rationale for going public, such as the use of your public stock to make acquisitions to give employees a liquid set of stock options for motivation and retention.

Under these circumstances, an IPO can be useful, but the IPO has clearly been over-glamorized by the press and is not for everyone. IPOs expose a company to very tough institutional investors, intense quarterly earnings pressure, enormous public disclosure (such as your salary!) and extensive legal risks. Worse, managers may nearly never be able to sell their stock. Be careful.

Should the state of the economy be a consideration when the opportunity for a buyout arises?

Absolutely. The future outlook for a company, much of which may be driven by the economy, is critical to valuing your buyout. Simply put, if you’re buying a company in slower economic times, you must pay a lower price and probably should use less debt to do the deal. Broad macroeconomic considerations are critical to any investment decision.

Does a large drop in the stock market affect the availability of cash for buyouts?

Not in the short term. There is more than $100 billion of capital available today to back buyouts. This is all committed capital, ready to go right now. However, in the longer term, if the stock market continues to decline, institutional investors have less resources overall and less money will be available for buyouts.

What role does timing play in a buyout?

It can be a huge factor. Knowing when to push for a deal, such as when a seller is desperate and all other buyers have disappeared or when your leverage is at its maximum, can have a big impact on the price you pay and the success of the deal. Deal making is part art and part science and you’ve got to study the tea leaves carefully.

Which part of the MBO process do you personally find the most exciting? The most difficult?

I love working with the managers to see them reach their dream of running their own company. It’s fulfilling and exciting. That’s my thrill and why I come to work each day. Conversely, going through all the legal documents, while very important, is a bit like root canal work (without anesthesia) for me.

With some of the corporate restructuring and downsizing going on, is this a fruitful time to be a manager seeking a buyout?

This is a best time ever to be a manager. The reason is that there are more than 500 buyout firms with $100 billion plus of capital available out there who are looking for good managers to back in deals. This means that it’s management talent, not capital, that is the limiting fact in today’s market. As such, managers are getting their best deals ever in equity ownership. This really is the manager’s decade.

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