When a manager considers selling part of his company, two options generally come to mind. He can open up the capital to a minority investor: he then retains control, but the immediate cash-out remains limited. On the other hand, he can sell the majority stake and collect more cash, but at the cost of losing control over the company.
Between these two extremes, there is an alternative: the Owner Buy Out (OBO). This mechanism makes it possible to transform a significant part of the company’s value into cash, while remaining a majority shareholder and continuing to develop the business.
What is an Owner Buy Out?
In practical terms, an OBO is a “sale to oneself”: the manager sells his company to a holding company that he controls. The operation is based on the following mechanism:
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Creation of a takeover holding company, controlled by the manager, who contributes equity (generally 30 to 40% of the price, alone or with co-investors). This contribution can be in cash and/or in the form of shares.
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Bank financing: the bank completes the package with a loan to the holding company representing 60 to 70% of the price. In practice, this usually corresponds to 2.5 to 3.0x EBITDA, or even 3.5x in very stable sectors.
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Acquisition: the holding company buys back the company’s shares from the owner (often 100%, but sometimes only part), who receives the sale price while retaining control via the holding company.
More and more managers are opting to sell their businesses in this way, in order to secure their assets without turning over a new leaf.
A concrete example
Let’s imagine a company valued at €5 million, with EBITDA of around €1 million.
The holding company’s financing could be structured as follows:
- Bank debt: 3 M€ (3x EBITDA, i.e. 60% of the price),
- Management contribution: €2 million
Mechanics of the operation :
- The holding company buys 100% of the company for €5 million.
- The executive receives €5 million, but having invested €2 million in the holding company at the outset, his net cash-out is €3 million.
- In this example, with no co-investors, he retains 100% of the capital via the holding company.
- The 3 M€ debt is contracted by the holding company and repaid from the profits generated by the company, in the form of dividends.
In practice: co-investors, financing, advantages and limitations of OBOs
Many OBOs are carried out with the support of co-investors, usually investment funds. In some cases, key managers or family members also participate, often on a minority basis. Their presence reduces the manager’s contribution, diversifies the shareholder base and can send a positive signal to banks, especially when a fund validates the valuation and believes in the company’s potential.
In practice, the manager does not always have the immediate cash available to contribute equity to the holding company. In this case, the contribution can be made in the form of shares, with the manager directly transferring a portion of his shares to the holding company in exchange for shares in the latter. Alternatively, the bank can set up a “reinvestment bridge”, i.e. a short-term loan that is repaid as soon as the sale price is received. These mechanisms make the operation possible even when personal liquidity is limited.
OBOs offer real advantages: they enable you to cash in a substantial cash-out while retaining a majority stake, secure and diversify your assets, and prepare for a second cash-out in the event of a future resale.
But as with any financial package, there are a number of points to bear in mind. The debt must remain sustainable, the level of the manager’s contribution must inspire confidence in the banks, the role and governance of co-investors must be clearly defined, and the tax aspects (contribution, sale, dividend payment) must be carefully analyzed.
It is also essential to prepare a solid presentation file and to sound out the banks beforehand: the quality of the file, the clarity of the business plan and the coherence of the package largely determine the success of the operation.
An OBO enables the owner to convert part of the value created into cash, while retaining control of the company. Properly structured, it is a powerful tool for securing assets and ensuring managerial continuity.
Are you considering such an arrangement? At AKCEAN, we support managers in structuring and negotiating these operations, so as to secure their implementation and adapt them to their wealth and professional objectives.
