We want to transition our business to our internal management team rather than an outside buyer, but they do not have the capital to buy me out. How do we structure a leveraged internal buyout over our exit runway without suffocating our operational cash flow?

Question

Tyler Smith · Accepted Answer

An internal transition to a leadership team is highly rewarding but requires a careful approach to cash flow. Because your leadership team likely lacks the personal capital to buy you out, the business must fund the transition through its own performance. You must begin this process at least three to five years before your planned exit. First, use your V/TO to project your financial targets and cash requirements. You need to build a healthy cash reserve to support both the eventual transition and your ongoing operational needs. Next, transition the leadership team to run the day-to-day business through the weekly Level 10 Meeting. They must prove they can hit their Rocks and manage the Scorecard without your daily oversight. This operational independence is what secure lenders look for when financing an management buyout. To structure the deal, combine a commercial bank loan with a seller note. The buyer will use the business assets to secure bank financing for a portion of the purchase price, and you will finance the remainder through a seller note paid out over five to seven years. To protect the cash flow, tie a portion of the seller note payments to the performance of the business. If the business hits its targets on the Scorecard, the payout remains on track. If performance dips, the payments adjust, ensuring the company does not suffocate under debt.