Equally important, buyers can't overreach. "If you had been running a $20- million company before, you shouldn't look at anything larger than $40 million," says Rickertsen. "Anything smaller is always going to be fine." And buyers need industry experience. If you've been running a finance division, you aren't going to be able to buy a retailer, unless you bring in someone with significant retail experience as part of the deal.
If you're not talking turkey after three meetings, give up. You only have a tire kicker.
Of course, if you're buying the company you work for, you probably already have the right experience. And if everything works out, you'll likely end up with a 10% to 20% interest in the deal, consisting of stock or stock options that usually vest over four years.
The question, of course, is, Will that equity be worth anything to you? The company you're about to lead is taking on potentially crushing debt. And you're trading your current boss for another one -- the buyout firm that provided you with the money. And if you think your current boss is tough, you haven't met an unhappy equity partner.
Many managers have never had to meet with a board of directors, Rickertsen says. When they participate in an MBO, they have to get used to board meetings -- and to the fact that there won't be a lot of room for error. "If you miss your plan by 20% for two consecutive quarters, we are going to have some very hard discussions," Rickertsen says with classic understatement. You serve at the behest of the board, he explains. "They normally can fire you anytime."
And, of course, the buyout firm controls the board. "At the end of the day, it's all about the numbers," Rickertsen says. "The buyout guys like me are fiduciaries; we're pension-fund fiduciaries investing for sophisticated institutions, and we've got a job to do on behalf of those institutions. We need to do the best we can with their money."
Rickertsen says firms like his are willing to work with you when things are bad. But you need to know going in where their loyalties lie.
OK, but a 10% or 20% interest in your current company is a lot more than you have now. And you're used to pressure, right?
When the company is the boss's baby
If you still think you're the kind of manager who's ready for an MBO, then consider the last variable: who's doing the selling. Things get a little different when the owner is a founder, Rickertsen says. To explore those differences in depth, we talked to Rickertsen specifically about what happens when a company's creator sells the business to his own managers.
Inc.: How different is it doing an MBO when the seller is a founder?
Rickertsen: Very. If you're a potential buyer, you need to recognize that the boss holds all the cards. So you've got to be very careful. At best, as soon as there's a whiff of disloyalty, you've put yourself into a penalty box that you may not be able to get out of. At worst, you'll get fired the moment the boss learns something is up. That's the risk of trying to bring it up.
Inc.: So if I'm a potential buyer, what do I do?
Rickertsen: You have two options. The first, which may or may not work, is to plant the seed early. You tell the entrepreneur casually that if he or she is ever thinking of selling, you would be interested in buying. That way the owner won't be shocked later on. In the interim, you make yourself as important as possible. That way you increase your leverage over time.
Inc.: How does an owner react to the planting of a seed?
Rickertsen: An owner might say something like "Well, I'm not a seller now. Let's just keep building the business." But sometimes the response is: "At this point in my career, I don't want to sell, and if you want to get on the team, get on the team. If you don't want to be on the team, get off the team. I just can't have a buyout clouding our strategy."
Inc.: Is there a way around that?
Rickertsen: Yes. You don't make the approach yourself. You find a buyout firm to make the call to see if the owner wants to sell. Owners get calls like that all the time. That way it's much easier. There's no question about your loyalty, because the owner doesn't know -- or isn't sure -- it's coming from you.
Inc.: Is there any way of telling how an owner might react when that call comes from "out of the blue"?
Rickertsen: Sort of. Owners are always in one of three places: They're not sellers under any circumstance right now; that's where most of them are. Or they're tire kickers. They'll talk to everybody who wants to buy their company, but they still really are not sellers. They just like taking meetings and getting a handle on what the business is worth. There are lots of tire kickers. And then there are real sellers. One of the most interesting things about being a buyout person is figuring out who is a tire kicker and who's serious, because you can waste colossal man-years on tire kickers.
