Let’s face it. Not every employee is going to want to stay with your company forever. Some people may have personal reasons for wanting to leave and start thinking about a different career path, or they might just not be interested in the long-term commitment that comes with working at your organization.
Giving them an opportunity to sell their stock at a fair market value and leave on good terms can be a great way to retain them as well as drive up the price of your company from potential buyers. A management buyout (or “MBO”) is an alternative exit strategy for employees that enables them to purchase the company stock they own at a discount.
An MBO is also known as a management incentive share award, which makes it easier for employees to meet the eligibility criteria for selling their stock. Here’s how you can make an employee buyout offer:
What is a Management Buyout?
A management buyout (or “MBO”) is an alternative exit strategy for employees that enables them to purchase the company stock they own at a discount. An MBO is also known as a management incentive share award, which makes it easier for employees to meet the eligibility criteria for selling their stock. Essentially, employees sell their stock to the company’s management team, who then uses that money to purchase the remaining shares. This allows employees to sell their shares quickly, without going through time-consuming and costly processes like an IPO or acquisition.
It’s also a much less risky option, because MBOs are typically financed with equity or the company’s own cash.
How to Make an Employee Buyout Offer
As with any offer, the first step is to determine your target. In this case, you’re looking to purchase the employee’s shares at a discounted price, so you want to start your offer higher than the current stock price. You can determine the current price per share by visiting a website like ycharts.com, or you can ask your company’s financial advisor to help you estimate the current stock price.
When you make the offer, you want to be very clear about all of the terms and conditions. You can use a buyout offer letter template to help you organize your thoughts, clarify your offer, and make sure you don’t miss any important details. MBOs are often done in stages, and the negotiation process can take some time.
You want to give employees enough time to consider their options and come to a decision, but you also don’t want the process to drag on too long and distract everyone from their normal work responsibilities.
Who Can Participate in an MBO?
Since MBOs are often done in stages, each employee who wants to sell their stock and participate in the MBO should have an opportunity to participate. This means you need to offer your MBO to as many employees as possible, especially those who are highly-valued and critical to the organization’s success.
Although some companies decide to limit MBO participation to senior executives and other high-level employees, it’s generally a good idea to include as many employees as possible. For one thing, it’s a great way to show appreciation for all of the hard work and dedication these individuals have put into your company over the years.
It is also a powerful way to attract top talent and show potential employees that your company has a healthy, positive culture. And, as we’ll discuss in the next section, it gives you the flexibility to negotiate a price that works for everyone and helps you close the deal faster.
MBO Timing and Negotiation Tips
As we mentioned, MBOs are often done in stages. This gives employees the opportunity to sell their shares at the price they want and get the cash they need to pursue their next career path. In each stage of the MBO, you can offer different percentages of the price. For example, you might offer 60% of the price in the first stage, 70% in the second, and 80% in the third.
This gives employees the option to take the money now or wait until the price has gone up and sell their stock for more. It also gives you flexibility and power in the negotiation phase. Employees have to decide whether to take the deal you’ve offered or wait for a better one.
Calculate the Discounted Employee Buyout Price
There are a few different ways to calculate the discounted buyout price, but whichever method you choose, there are a few things you need to keep in mind. First, you want to make sure you’re offering enough of a discount to make the deal appealing to employees but not so much that they turn your offer down.
You also want to make sure you’re keeping the company’s best interests in mind. These two goals might come into conflict, but there are a few ways to balance them.
For example, you can offer a flat discount of 5% or 10% off the current stock price, or you can offer the discount as a percentage of the employee’s existing shares. The latter option gives you more flexibility and lets you adjust the offer if the price of the stock changes.
Determine the Fair Market Value of Company Stock
You’ll want to do some research to determine the fair market value of your company’s stock. You can start by looking at the company’s current stock price, but you’ll also want to consider factors like the industry in which your company operates, the company’s revenue and earnings, its total number of shares, its financial health, and its growth potential.
For example, let’s say your company’s stock has a current price of $10 per share. If you bought the stock at $5 per share, that means your company’s valuable assets are currently worth $50 million. If you want to give employees a 10% discount on their stock, that means they should receive $9 per share. But if you look at the current stock price and see that it’s $10, that means your company’s assets are worth $100 million. That’s an increase of $50 million in just a few years!
Make an Offer and Negotiate a Final Terms
When you make an offer, let the employees know the details of the MBO and the current stock price at which they can sell their shares. Let them know how much of the price they’ll receive up front, as well as how and when they’ll receive the rest of their payment. If employees accept your offer, you can move on to the next step: negotiating the final terms.
Evaluate Employees’ Requests and Determine Your Final Terms
At this point, you’ve already evaluated employees’ requests. You’ve done your research, considered your finances, and determined how much you’re willing to offer. Now it’s time to communicate that decision and close the deal.