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Challenges in a management or employee buyout

A management or employee buyout faces challenges on several levels. The quality of the management team, the future dynamic with the other employees and the financing of the transfer are just a few of these challenges.

First and foremost, you must be able to create a strong team with balanced and complementary knowledge and skills. The financial partners or external investors that will join this new team will want to be reassured of its solidity, its capacity to work together and its capacity to grow the company. Convincing these people that the team is strong is one of the biggest challenges, all the more so because the financial means of employees are often limited.

It is possible that some managers or employees will be excluded from the new partnership. They could leave the company, which might have a destabilizing effect, especially if they occupy key positions and have unique skills. The new team must not only be able to identify tensions, but also to prevent them, and even to eliminate some of them by redefining roles and adopting profit sharing measures aiming to generate loyalty, for example.

On one hand, since managers and employees know the business well, their purchase offer may be much closer to the fair market value of the company than what a third party might offer. On the other hand, they know that their skills and talents contribute to this value. As such, the negotiations could turn out to be rather arduous, sometimes even more than in the case of a sale to a third party.

The owner-manager must also consider the consequences of a breakdown in negotiations with the employees. In such a case, the employees might be resistant to a sale to a third party and leave the company, with a possible ultimate effect of lowering the value of the company.