Two ways to approach management buyout

APPEAL TO VALUES

DENISE DEVEAU When lg2 founders Sylvain Labarre and Paul Gauthier began thinking about exiting their Montreal-based ad agency, they looked 10 years into the future. They gave themselves a decade to complete the process of selling the business to a management team.

They could have chosen another route. As Jeremy Gayton, partner and president in the Toronto office says, most independent agencies either go the IPO route or sell to a larger conglomerate. “Rather than impede our growth and our culture, the founders decided they had 10 years to put a mechanism in place that would allow us to remain independent.”

The founders’ first step was to identify the people who would complete and complement a new management team, Gayton says. Others have been added over time. “The 10-year window was essential since it provided a way to transition without placing an undue financial burden on the company or the partners.”

To do that, the founders took a unique approach to financing the deal, one that didn’t require any personal investment, explains Mathieu Roy, partner and president at lg2’s Montreal office. Rather, the new partners pooled their resources and leveraged the power of the company’s performance to reinvest the dividends. “It was a very unique approach that opened up so many possibilities for partners.”

Because they took their time, the culture has remained intact and the transfer has been smooth, Roy adds. “And because so much was planned in advance, we were able to improve our revenues and profits.”

Roy says the plan is to replicate the formula moving forward, as many of the current partners are now in their mid-40s and looking to exit over the next decade. “We’re already thinking about the next transfer process.”

It took half that time for Rimouski, Que.-based Miralis to complete its management buyout. When Dominic Deneault, founder of the high-end kitchen cabinet manufacturing operation was ready to retire, he already had successors within the company in mind.

CEO Daniel Drapeau says five people — including the owner’s son — made up the new management team. “He wanted the company to more than survive once he retired. But he also knew it takes time to get everyone’s confidence.”

Drapeau says they worked with BDC to create a funding model that could be reimbursed over time. The split in shares was calculated based on each person’s contributions and role.

Eric Prud’homme, general manager at Desjardins in Montreal, says management buyouts make the most sense when founders want to ensure the long-term success of the company and its core values. “Very often the focus is on financials, ratios and structures. But the decision is mainly based on the values of the founders. A company will often lose its hold on that if they sell to a private equity investor or external company.”

There are typically two types of approaches to a management buyout, Prud’homme says. “One we don’t recommend is a quick transfer. This is more risky for everybody and the margin for error is much higher.”

Instead, he recommends a gradual transfer of management and ownership, such as the one executed by lg2. “This allows you much more flexibility so you can make adjustments and reassess the transaction along the way.”

He offers his Top 10 points for those transitioning ownership to a management team:

Prepare a management team in advance who will be able to take over the company operations, leadership and vision. Take into consideration their management skills and their conviction. “Founders and key employees may have different ways of managing a business, but the values have to be the same during a transition.” Be patient. Agree to a long-term vision and core values and stick to them.

Structure the buyout to be financially viable for the shareholders.

If possible, have the founder(s) stay on as advisers/board members for a designated period posttransition.

Choose accounting firms, taxation specialists and other financial players who are willing to work together in your best interests.

Allow a time frame for members to gain any skills they may be lacking.

Establish clear criteria for key employees.

Document everything, from transaction structuring to leadership roles and responsibilities, and include projected time frames.

Communicate with employees, clients, partners and suppliers throughout the process.

As Prud’homme notes, a management buyout isn’t only about the price you can get.

“Owners want the people who helped build the company and contributed to its success to take over and pursue their mission,” he said. “It’s really a human decision.”