Often, the existing management’s lack of capital and an owner’s fear of not getting fair market value for their company, represents significant obstacles in pursuing and completing management buyouts. In many cases, management overcomes its lack of capital by partnering with a private equity firm to effect the transaction. The private equity firm negotiates directly with the owners, uses their equity to buy the Company and “gives” management an incentive based package whereby management owns a small portion of the Company. Once the transaction is completed, the private equity firm usually replaces most or all of its initial invested equity with new debt. The end result is that management is left with minimal ownership and is now tasked with repaying the new debt.
Tunstall specializes in helping management teams navigate MBOs and secure their own financing, effectively utilizing leverage and financing alternatives that allow them to gain independent operating control. Simultaneously, Tunstall can assist the seller by helping them hire a broker to identify outside buyers, while continuing to work with management to develop a matching financing package. This scenario creates a win/win for all parties as management is given a chance to buy the Company and the seller is comfortable that the offer is fair based on the results of the broker's marketing efforts.
Management had been in place for 20 years, however did not own any equity in the Company. The owners were both 72 years old and had not been active in managing the business for 10 years. The owners wanted management to buy the Company but they wanted the best possible price.
Tunstall helped the owners hire a broker who produced a strategic buyer offering $23 million for the Company. Simultaneously, Tunstall assisted existing management in developing a business plan and negotiated several proposals with multiple institutions to match the offer. Management ultimately opted for a $17 million senior debt facility and $6 million of mezzanine debt.
The owners achieved a market price, cash transaction and management retained 85% ownership.
Management decided to purchase the Company’s remaining outstanding stock in response to an unsolicited bid to the Board of Directors from a financial buyer.
Tunstall utilized a leveraged employee stock ownership plan (ESOP) buyout strategy that allowed bank financing to go directly to the ESOP. This ESOP structure allowed principal repayment to be tax deductible by the Company and 50% of the interest paid to the bank was excluded from the bank’s taxable income, providing the Company with a low cost of capital. Tunstall sourced a $16 million revolving credit facility and term loan, which allowed management to purchase the outstanding shares of common stock through the ESOP.
Tunstall developed a financing structure that was appealing to the lenders, and also provided management the financing they needed without entering into a more dilutive private equity investment.