How One CEO Leveraged A Two-Step Buyout
April 13, 2017
Linda Etter — CEO, president, and owner of IT staffing services company e&e —and her husband Tracy Etter, the company’s secretary/treasurer, had seen great growth in their business since its inception in 2002. In 2014, they began thinking about selling e&e outright as the demands on them and their team continued to mount. At one point, Linda and Tracy were averaging 60-80-hour work weeks.
One of the Etters’ investment advisors approached our firm, IMB Development Corporation (IMBDC), about potentially buying e&e. While we liked the business, we believed both Linda and Tracy were too valuable to leave immediately after a sale and that a poorly planned exit would result in customer and employee churn.
Together with the owners, we decided that a typical one-year transition period would not be sufficient. Instead, we agreed upon a Two-Step Buyout™.
Step One: We offered Linda an upfront payment of 2/3 of e&e equity value, while she retained 49% interest in the business. With this structure, Linda and Tracy continued in their current executive roles, and IMBDC structured and executed a plan to help hire ten people to the executive and administrative team. This investment has allowed Linda and Tracy to have less day-to-day involvement, focus on strategic priorities, and reduce their hours in the office by fifty percent. This administrative structure may remain in place for three to seven years as new leadership is on-boarded into e&e.
This transitional process allows owners to pull out the majority of their equity, while still attracting capital to fuel growth in the business. It also enables early diversification of the owner’s assets and signals to stakeholders the beginning of a robust succession plan.
Step Two: Three to seven years after step one, the company may pursue recapitalization or an outright sale. Since the structure allows more time for the business’ value to increase, this allows the owner to get a second bite at the apple.
In the case of the Etters and e&e, the business has since acquired new Fortune 500 clients and purchased a Florida-based IT staffing and consulting firm, resulting in EBITDA growth of over 40%. This has significantly increased the value of Linda’s remaining stake in the business.
When to Consider a Two-Step Buyout
Since the success of many middle market companies is often heavily linked to the founder or CEO, a Two-Step Buyout approach can be advantageous, but it can be tricky to navigate.
The mark of a successful succession plan will be the uninterrupted, continued operations of your company. A smooth transition ensures that the company’s leadership team has capacity to support the next era of growth and the departing CEO reaps the rewards of his or her hard work.
Our Top Tips for a Two-Step Buyout
- Choose a financial or strategic partner who has a deep understanding of the management team’s impact on the business pre-transaction.
- Choose a financial or strategic partner who has demonstrated an ability to create value post-transaction and an ability to partner with owners.
- Prioritize working with firms who understand the complexities of your industry.
- If your business is a certified minority- and/or women-owned business entity (MBE and/or WBE), consider structuring your Two-Step Buyout with a partner who has experience with businesses like yours and can maintain your certifications if appropriate.
- Be mindful of your personal timeline and goals. Two-Step Buyouts are typically advantageous for owners who still want to participate actively in the growth of their business.
If you’re considering recapitalization or an exit, and don’t know what structure or timeline is best for your business, it’s best to start planning early.