Buyout

Valuations are down, investment capital is abundant, and skilled, seasoned managers are scarce. There's never been a better time to buy the business you work for.

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Suppose, for a minute, that Rick Rickertsen is right.

Sure, he has an agenda. He's a partner at a private-equity investment firm, and he makes his money by keeping a steady flow of deals coming his way. Every management buyout Rickertsen's firm invests in yields up to 1% of the sale price up front plus an ongoing management fee that can top $150,000 a year. In addition, the firm earns an expected annualized return of 30% to 35% on its stake in the business when the company eventually gets resold three to five years down the line. So Rickertsen wants deal flow. Heck, he readily admits that's one of the reasons he wrote Buyout: The Insider's Guide to Buying Your Own Company, recently published by Amacom. He'd probably be happy if you were to read the book and give his firm a call. (Rickertsen is chief operating officer of Thayer Capital Partners, in Washington, D.C.) So when it comes to whether or not managers buy their companies, he's far from neutral.

Still, Rickertsen's self-interest doesn't prevent him from being a good guide to the buyout marketplace. He certainly has the credentials: Stanford University undergrad, Harvard Business School, and a stint at Morgan Stanley. And he has the experience. He's led more than 50 management buyouts. Plus, he's even spent some time with early-stage venture-capital firms and has been chairman of several companies in Thayer Capital's portfolio. He's looked at deals from all kinds of perspectives.

So suppose Rickertsen is right. Suppose there really never has been a better time to buy the company you work for. Should you do it?

Rickertsen certainly thinks the timing's right. Here's why.

• There is a huge amount of money available to help you finance your purchase. Spurred by the stellar returns of early buyout firms, the money people on Wall Street have been rushing for much of the past decade to create buyout funds. Back in 1989 there were half a dozen buyout funds that had $1 billion or more to invest. A decade later there were nearly 40, says Rickertsen. He estimates that today there are about 500 buyout firms with a total of $150 billion to invest. The main goal in life of these firms is to back management teams that want to do buyouts. And when you figure that banks will lend at least $2 for every $1 of equity that is put into a deal, that means there is nearly $300 billion out there waiting for you . (For a step-by-step look at how the buyout process works, see "Buyouts by the Numbers," below.) Not even the Nasdaq crash has hurt the pot, since the two main consequences of the decline have tended to cancel each other out. Yes, the big institutions that put money into buyout funds may have less to invest because of damaged portfolios, but the reduced investment appeal of publicly traded companies has prompted those same institutions to consider investing their resources elsewhere -- which is to say, possibly on you.

If you buy the company you work for, there are inherent advantages.

The message Rickertsen wants you to take away from all this: it has never been easier to find money for this type of deal.

• Investors need you. While money isn't a problem, Rickertsen contends that finding management talent is. There are just not enough senior managers to run all the companies that could be funded by private-equity deals. Thus, the laws of supply and demand come to the fore. Before management-buyout (MBO) funds became all the rage, managers who were involved in the buyout of the company they worked for might have ended up with a 10% equity interest in the business. Today 17% is the norm, and the figure can go as high as 22%, depending on how much work you're willing to do up front before the deal is done. So, says Rickertsen, from the perspective of the would-be management team, the deals are as good as they've ever been.

• Prices are falling. The Nasdaq's troubles and the looming recession may not have diminished the money available for buyout deals, but they have slashed the prices people are willing to pay for businesses. You, the salaried manager, may be willing to overpay for the chance to run your own company, but the buyout firms are not. Paying less makes it easier for them to generate the returns they require. Every deal is different, but Rickertsen says that this general observation is true: before the slowdown, companies were selling at 7 to 7.5 times cash flow. Today they're going for multiples of 6 to 6.5.

The upshot of all those factors is that it's a terrific time to buy. Lower prices mean that not only will buyers have to pay less, but they won't have to borrow as much. If Rickertsen's valuation numbers are right, the amount of debt needed to finance a buyout is about 20% less than it was a year ago.

Of course, there are the inherent advantages you bring to the table if you're buying the company you already work for. You know the business, so there is no learning curve. Better, you know what fat can be chopped with a minimum amount of pain. In an in-house deal, secrecy is more assured. The owner may not want it known that he or she is shopping the company, and selling to managers makes it less likely that the news will slip out. And, finally, you can do the deal in less time than an outsider could -- four months would not be out of the question.

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