Loading...
Answers
MenuHow much could an exit process be disrupted by a concurrent MBO?
Answers
These are questions best addressed by the corporate advisory service handling the sale of the business.
It is not necessarily a lengthy process to secure a PE deal. Some PE firms are well placed to take a quick decision provided, and this is an important caveat, provided you are well prepared and have all your ducks in a row.
And you have the advantage of a full management team and one (presumably) already motivated by a share incentive scheme.
It's imperative you have a good corporate finance adviser on board. It may well be that your best option is for the management team to raise finance independently and without relying on PE.
I must confess that the latter part of your post has lost me completely and I've no idea what you're trying to get clarified!
There are several possible ways of exit for a company. Going public with initial share offering or which we call IPO is first option, Trade sale, Buyouts and Leveraged Re-Capitalization are other possible ways.
Whichever exit strategy founders/investors adopt the first and foremost thing is company valuation. There are several ways in which a company could be valued.
You can use Discounted Cash flow Method to discount your Free Cash Flow and then to get Terminal Value using discount rate and growth rate and then discounting the terminal value over the period you discounted your FCF and then to get Implied Enterprise Value. Other than this you can use Trade Comparables using EV/EBITDA or EV/Revenue Multiples. You can use average of your profits to date for calculating Goodwill but Goodwill is not advisable for Startups which are yet in the scaling up phase.
Normally using Trade Comparables is the most suitable valuation method to avoid any type of conflicts. Using the valuation of Company you can then calculate its share price for IPO or you can determine Initial Offering Price if you are going for Buyout.
Usually Trade Sale or Leveraged Re-Capitalization are most suitable form of exit. In a trade sale transaction, owners can also exercise more control over the whole process, and in certain cases might even end up obtaining a higher value for the company compared to other exit methods. While under Leveraged Re-Capitalization you can extract cash without selling company. Under this method you can substitute some of the company’s equity with additional debt. The most important advantages generally associated with leveraged re-capitalizations are that owners can remain in control whilst still receiving payment and the possible tax benefits compared to other types of exits.
Another option is Secondary Buyout which I will prefer over Leveraged MBO. under secondary buyout you can sell your company directly to Private Equity Investor rather than waiting for the management to secure funding through private equity you can offer it directly to an investor.
Owners prefer MBOs because they think that employees of a company could better run it using their existing client base and relations as well as their understanding of that company but if an MBO is carried out through Private Equity Funding it will definitely raise the debts of company and in most cases will transfer partial control of company to the private equity investor in the form of equity transfer.
Other than this MBO may result in low value transfer of company which is not advisable if other options are available. As the management has access to insider information so they may use unfair means to get a lower Enterprise value for lowering the burden of debt to finance the buyout. Another reason is limited access of management to capital which could affect the price and the terms of exit process.
If a company/enterprise is valued well using the proper valuation method benchmarked against industry/market using fair and justified free cash flow then the chances of valuation conflict will be lower than otherwise even if concurrent MBO is going on. It will be much more difficult for the management of company to use unfair mean or to exploit insider information to influence/halt the ongoing exit process.
Related Questions
-
What exit strategies do angel investors want/prefer for a service business?
Keep in mind that investors invest for returns. Telling a prospective investor that you want his or her money to grow your business but don't plan on ever generating a liquidation event that pays him or her a dividend is not likely going to work; angel or not. You may be better served with debt financing where returns are generated in the form of interest payments not equity value growth. BUT, if equity financing is the plan, you're going to want to develop a strategic exit plan right from the start. That means identifying prospective buyers, strategic channels etc and characterizing the value drivers for each right up front. You'll find prospective buyers come in a number of forms; competitors, bigger versions of you, strategic partners, private equity, etc. Each will value your business in different amounts for for different reasons. Understanding this is vitally important for you to navigate to securing the right money, from the right sources, with the most favorable terms. Once you've qualified and quantified each of them, then determine what (specifically) you're going to need to do to align your business with those prospective buyers generating the highest returns. This will drive your business model and go to market strategy and define your 'use of funds' decisions. This in turn result in a better, more valuable business whether you exit or not. Do it this way and you'll have no trouble raising money from multiple sources. You can learn more about the advantage of starting with a Strategic Exit plan here: http://www.zerolimitsventures.com/cadredc Good luck. SteveSL
-
Need an expert advice on budgeting for a startup and equity allocation in the startup.
1. Before you dive into building out marketplace software you might find it easier to quickly test your MVP using a SaaS product like https://near-me.com/. I am NOT affiliated with them. But in a previous startup explored the marketplace concept. Spend 12K for a year on a SaaS product then spending so much more doing it from the ground up. If you gain momentum then start to build out your own platform. 2. Technical Co-founder is the person who will help bring your idea to life so enough skin in the game to keep them motivated and keep him/her hungry. 3. Remember 100% of 0 is 0. So if the CTO wants 20%-25%. Does it really matter at this point? No it doesn't. 4. Make sure you understand how to tackle the marketplace problem of the chicken and egg. You have supply on one side and demand on the other. What comes first? You should think through that as well.TP
-
Which is better 1099 vs W2? See details...
I'm assuming you're talking about yourself, working for another company? The first thing to consider is that a "1099" is NOT an employee, rather an "independent contractor". The IRS takes it seriously when a company claims 1099 contractors, when in fact, these contractors are treated as employees (the IRS wants payroll tax and will fine companies that miscategorize). To be a 1099 contractor, rather than an employee (W-2), you must have complete control over your schedule - when you work, how much ect. There are other criteria, but this is the main one - you must clearly not be treated the same as an employee. The other thing to consider is that if you are a 1099 contractor, you are responsible for paying and submitting your own income tax and self employment tax to the state and the IRS. It is more advantageous for a company to pay you as a 1099 contractor as they save paying employer portion of payroll taxes. Also you will not count as an employee for the Affordable Care Act (which impacts companies with over 50 employees). Hope this helps. KathrynKC
-
do you advice on all aspects of running a ecommerce business such as marketing , banking etc?
Yes. For USA based businesses – we consult on everything from conceptualization to completion, including federal, state, and local laws/regulations, etc. We even provide referrals for Branding (Logo/Product Packaging, etc.), Website Building & Security, SEO, Google Search, etc. If you know what you want to sell (and it is not prohibited by law), we are able to provide clarity to have you up and running within 30-days on average.DP
-
What is the best way to split equity for three founders?
You are thinking about it wrong. Don't think of your organization as a pie. Think of it as a house. When you add an extension (say a new kitchen) to your house, the value of your new kitchen now accounts for a larger *percentage* of your house, more than it did before. But something else also happens. Your house is now worth a lot more. I highly recommend you watch the series on raising money for a startup by the Khan Academy - http://robt.co/1u1wCsxJS
the startups.com platform
Copyright © 2025 Startups.com. All rights reserved.