Family Business Buyout

Hey All,

Apologies in advance for the long post, but I'm in an interesting situation. I'm currently working in a Corp Dev job (about 3 years out of school), but have had serious talks with my grandpa to join his business - think Specialty Industrials company with highly engineered products, does about $12M in Revenue and around $4M in EBITDA. In addition to having serious talks about his business and the potential role I would play going forward, he's contracted me to do consulting work for him over the last year, something that has been mutually beneficial for us both. It's allowed me to get a "peak under the hood" as well as gave him valuable insights into his Product pipeline/Business development efforts. I've always envisioned working there and proving myself enough to a point where I could negotiate performance equity comp or even just a "buy-in" to the business, as a managing partner.

However in the last 2 months, he's been approached by a pretty big name Strategic acquirer in the space to buy about 80% of the company at a 5-6x multiple, with a clause to buy the remaining 20% in about 3-5 years. My grandpa is getting older and wants to take chips off the table, which I can understand. The deal would allow him to transition out of the business in about 3 years, leaving some key family members, myself and the rest of management to take over in his absence. 

Essentially my question is twofold: 1.) Whether it's possible, given the probable acquisition in the next few months, for a management buyout to be done?; and if so, 2.) what would be the best way to structure that transaction? 

I feel there a few ways to go about this. Bear in mind, I don't expect to execute a significant buyout of the company; I'd be aiming for a few percent, depending on financing constraints.

I could be wrong, but maybe establishing a promissory note/seller financing arrangement with my grandfather would be ideal, assuming that he's willing. If he's not comfortable with that option, what would then be the best course of action in terms of seeking financing, and the ideal type of debt for this scenario? Ideally I'd be able to service the debt payments with cash flow from the business.

I'm clearly not an LBO expert, nor have I worked in PE before, so any wisdom the experienced people on here have to offer would be much appreciated. Let me know if you want me to clarify anything and I'll try to explain, within reason.


Private Equity Interview Course

  • 2,447 questions - 203 PE funds. Crowdsourced from 750k+ members
  • 9 Detailed LBO Modeling Tests and 15+ hours of video solutions.
  • Trusted by over 1,000 aspiring private equity professionals just like you.

Comments (5)

Most Helpful
Jun 13, 2021 - 6:40pm

1. It's always possible for a management buyout to occur. How this impacts the potential acquisition is up to the acquirer. It's all open to negotiation, assuming nothing has been signed yet.

2. Would highly recommend taking a good look at the business and deciding whether or not you can really add enough to the business that it would significantly improve either EBITDA or the multiple it transacts at. Also take into account whatever sweat equity and opportunity cost have to be factored in. 5-6x EBITDA doesn't sound like a bad multiple, depending on the exact nature of the business being acquired, though I'll defer to anyone who's actually in Industrials to weigh in.

Jun 13, 2021 - 7:47pm

Wow that EBITDA margin seems great? 5x - 6x seems low IMO in this market? He should definitely engage a small iBank to help with the sales process if you don't work something out with him by the way, the company has enough EBITDA to be suitable for it. I think @APAE (username wont tag for some reason) would be able to help here.

  • 3
Jun 13, 2021 - 8:52pm

When you say you are wondering if an MBO can be done, I assume you mean an MBO instead of the PE LBO? I think it is highly unlikely that you will be able to get financing to do your own MBO. For context, I work in LevFin and spend a lot of time financing acquisitions and LBOs. You're probably going to be stuck getting financing from the business banking division of a bank and won't be able to achieve the leverage of a well-known sponsor. This will make it difficult to match their offer. 

If you mean to structure the transaction where that PE firm helps you execute an MBO, I think it would be highly unlikely they'd want to involve you. For one, you're not part of the current management team, and they probably would see your lack of experience as a red flag. 

Leveraged buyouts generally use some combination of TLAs, TLBs, and High Yield Bonds. You are not going to be able to effectively access the TLB or HY Bond market because your transaction size is too small. It is highly unlikely that a person with your work experience would be able to convince a small investment bank to help you access the TLA market. I think you will be relegated to a normal business loan from the business banking division of a bank (for scale, these divisions cover mom and pop stores up to medium sized McDonalds franchises). 

Without large amounts of leverage, you'll need generous seller financing from grandpa. The issue is he won't get much money up front, so he'll be holding most of the company (and thus most of the risk) while an inexperienced management team (you) comes in. I feel like that is the exact opposite of what he wants. Not to mention that you'll get almost all of the upside (assuming the seller financing has no equity kicker), and he'll hold most of the downside. 

Jun 30, 2021 - 7:04pm

Illum corrupti tempore natus autem. Eaque excepturi debitis id voluptas cum illo. Et error dolorem vel assumenda distinctio porro. Facere perspiciatis voluptas qui.

Start Discussion

Total Avg Compensation

September 2021 Private Equity

  • Principal (7) $694
  • Director/MD (18) $575
  • Vice President (67) $365
  • 3rd+ Year Associate (68) $270
  • 2nd Year Associate (139) $254
  • 1st Year Associate (284) $222
  • 3rd+ Year Analyst (25) $160
  • 2nd Year Analyst (61) $135
  • 1st Year Analyst (183) $118
  • Intern/Summer Associate (20) $67
  • Intern/Summer Analyst (218) $59