Communication, credibility key to successful management buyouts

April 26, 2012
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Summary: 
A management buyout is often more than just agreeing on price

Most people will reach a certain age and slip quietly off into retirement. However, for those businesspeople and entrepreneurs who have built a company from the ground up, retiring is not always as simple as clocking out on a Friday afternoon, never to return to work.

When the owners of Tetrad Computer Applications—a leading provider of geographic information management software (GIS)—decided it was time to hand over the reins of the company they helped build, they wanted to be sure it was left in good hands. What better hands than those of the company’s four most senior managers, Michael Simon, Norm Genier, Alfred Jim and Sig Isaac.

“After 45 years with Tetrad, the previous owner and president decided it was time to retire,” explains new Tetrad president Michael Simon. “It's very important to have a succession plan, so when we knew this was coming, I got together with three of my senior colleagues and we suggested a management buyout. Having all served for many years, we knew the company intimately and were committed to guiding it to greater future success.”

Buyouts – more than just price
However, as Simon and his colleagues soon learned, a management buyout is often more complex than agreeing on a price. Many sellers want to ensure their legacy and the reputation and integrity of the company they have helped build remain intact.

“When you're buying from someone who is so closely attached to a company it is essential to build credibility for yourself and keep the lines of communication open,” says Simon. “Rather than go it alone, we sought out the services of merger and acquisitions specialists, the Summit Group. David Gray, Summit president, was able to help us put together a solid business plan, educate us on the buyout financing process and introduce us to the people who could help make our buyout a reality.”

One of those people Gray put Simon in touch with was First West Capital vice-president Robert Napoli. An expert in subordinated debt and mezzanine financing, Napoli was able to work with Simon and his colleagues to enhance their buyout financing package.

The financing mix
Like many buyouts, the Tetrad deal was achieved through a mix of specialized subordinated debt from First West Capital, personal equity from each of the four buyers and a traditional commercial loan.

“Led by Michael, the Tetrad management team was energetic and enthusiastic about taking over the business,” says Napoli. “In addition to the traditional loan and financing from First West Capital, all four buyers also contributed a significant amount of personal equity to the deal, further demonstrating their commitment to Tetrad."

“When coordinating a deal with multiple funding sources, it’s important for clients and funding providers to have patience and perseverance, but also remain responsive and in touch with each other. As the Tetrad team learned, these deals can be very complex and require the support and expertise of many people. Open communication is essential.”

The First West Capital experience
After meeting with a number of financing providers, Simon says they partnered with First West Capital because of its local, mid-market focus, responsiveness and the critical but supportive business eye.

“We had a really good connection and chemistry with Robert,” says Simon. “He probed us with a lot of deep questions and his honest, critical thinking helped us validate and solidify our plan. First West’s mid-market focus and quick but detailed responses were really what we were looking for."

The First West Capital advantage
First West Capital provides:

  • Innovative and flexible subordinated debt solutions;
  • A client-centred approach that results in exceptional service; and
  • Responsive, firm and clear commitments that allow you to get on with what you do best—run your business.
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