Methods for Negotiating Your Boss's Sale of the Business

Aspirations of "I wish I were the boss" are millennia old. Employees are increasingly able to make their dreams a reality, and their employers are frequently covering the costs. You may find success with the "leveraged buyout" phenomenon.

The business press is full of stories about employees, unions, and/or key management groups buying their companies. Such a tale typically implies the new owners have incurred considerable debt in order to finance the acquisition and that they have pledged the business's assets in order to do so. The press would have you believe otherwise, but the reality is that a well-structured leveraged buyout requires a lot of work, and the amount of time spent on preparation can mean the difference between enormous success and financial devastation.

The following are the steps to take in order to formulate a viable strategy: Examine the company objectively at first. How well, if at all, do you think you could perform in charge?Write down what you're thinking and make a case for yourself. Maintain your resilience. Keep track of your progress by recording your strategy on paper. For the next five years, hypothesize what the company will earn and how much money it will make from selling its current products and services. You're in for trouble, even if the company has a lot of stuff (land, buildings, equipment, patents, staff, contracts).

The next question to examine is whether or not, within the following five years, the capital structure (debt plus equity) of the company under your leadership presents any untapped opportunities for growth. Use these revenue and expenditure data to augment your original estimates. Examine the updated figures for your profits. Keep in mind that the start-up phase of any organization is typically characterized by higher expenses and lower profits than one might anticipate. Do yourself a favor and give yourself some breathing room.

Take a step back and look at the business objectively again, but this time, value the assets. Even though you've already started working for the organization, you should still follow the due diligence process to the letter. Request access to the company's financial records, tax filings, and other relevant paperwork from the owner. Consult the company's accountants, lawyers, and other consultants before proceeding. Get in touch with partners, clients, and coworkers as well. Look at the standards and data that the industry has made available.

Under such close scrutiny, you should inquire further about anything that doesn't make sense. Purchasing a company, especially one that has sentimental value, is much like purchasing an old house: you know there are skeletons and creaks, and although some are lovely and tolerable, others might be true killers.

For instance, environmental issues have been gaining prominence recently and can no longer be disregarded. An environmental examination of the property you intend to buy is likely to be required by your financial institution, and any issues found there could have serious consequences for the sale. When I was a buyer, I encountered a circumstance in which the seller's profit was completely wiped out by the cost of environmental clean-up.

After you're confident that you have complete data on a company, run many valuation models to get a sense of its true value. Earnings multiples, asset value plus goodwill, considerable premiums over valuation, and complex models all seem to have a role in the sale price of privately held businesses. No one metric can be used to determine an accurate valuation of a business. Understanding the appropriate payment amount and terms is crucial to planning for the future. Next, the difficult process of negotiating the purchase price can begin.

Whenever a customer asks for my advice on purchasing a business, I always tell them to focus on negotiating favorable terms rather than the purchase price. Once upon a time, I was able to arrange a sale in which the seller and the internal purchasers had vastly different estimates of the company's value.

Although the final dollar amount of the sale price plus interest was higher than the seller originally asked for, we were able to structure the deal so that the net present value (if you had to buy it in cash today) was the same as what the buyer wanted to pay. It took 5 years for the company to transfer from the old owners to the new ones, during which time salaries and perks were equalized and one of the new owners took over as president in the third year. A smooth handoff occurred as a result of both parties taking a relaxed approach to negotiations and being open to some degree of flexibility in terms.

If you've negotiated a favorable arrangement, what are your plans for covering its costs? An acquisition can be financed in numerous ways, and a leveraged buyout is only one of them. You, your friends, family, and coworkers, as well as local, state, and federal governments, financial institutions, professional investors, and venture capitalists, are just a few examples. Use these funds to supplement the portion of the acquisition price being supplied by the acquired company and the sellers. The difference between long-term success and failure often comes down to the financial plan that was put together. The time needed to locate and secure funding sources is between two and six months.

You've put in a lot of effort, but you still haven't closed on a business purchase. Not until the closing will you own it. Take caution, as many deals fail to materialize in time for the closing session.

Keeping your end of the bargain after it's been finalized is crucial. Congratulations! You have just become the official owner of the company. The former employer is excused from any wrongdoing. You've made the most of this chance and are now an entrepreneur. You have to pay your expenses and your staff. You must provide the requested goods or services.

And you've gone into it with a no-nonsense business mindset, which will undoubtedly boost your chances of success. Right now, the buck has to come from you. It's a beautiful sensation, and if it gets into your veins, it will stay there for a long time. I wish you the best of luck as the new head honcho.