TOOLS FOR LEADING AN MBO TEAM.

For success in what one COO of a management buyout firm dubs the "manager's decade," he details three issues that are central: what skills the executive needs, what preparations need to he made and how to manage the exit.

In recent years there seemed to be no end to the feast available at the public equity market trough, especially for management teams that wanted to separate from larger enterprises. The good times ended abruptly, and in order to finance operations, management teams now have to consider other options.

Among the myriad of financial instruments available to capital-seekers, perhaps the murkiest option is private equity. While there is a wealth of information available on the process for managing through the public debt and equity markets, private equity deals have been hidden under a cloak of secrecy, and financiers answer nearly every query on standardization with "every deal is different." Of course, so is every IPO.

However, Rick Rickersten sees this as the "manager's decade," and he sees particular opportunity for financial executives. Rickersten is chief operating officer at Washington, D.C.-based Thayer Capital, a firm specializing in management buyouts. In Buyout: The Insider's Guide to Buying Your Own Company (AMACOM, 2001), published earlier this year, Rickersten removes at least one layer of opacity from the private equity process.

"The thing I like the most about the management buyout world, is working with the managers," Rickersten says. "I have always thought it would be better for everyone if there was more transparency to the process," which, he says, is why he wrote the book.

Long associated with the buy-and-bust model of the late 1980s, which was given form in Barbarians at the Gate, the leveraged buyout has become more manager-friendly in the intervening years. The environment has changed significantly in that there is a phenomenal amount of capital pouring into the market -- more than $100 billion since 1999, according to Buyouts, an industry newsletter, and the number of players has increased as well. Now, firms have a limited number of partners managing so many deals that they can't become involved with day-to-day operations. As a result, firms investing today want to have a management team they can trust.

Buyout offers insights into the investor mindset, as well as valuable information on how financial executives should prepare themselves for the arduous process. Rickertsen focuses on three issues that are central to successful deals -- what skills the executive needs to get involved in a buyout; what preparations need to be made once a buyout opportunity has been identified; and how to manage the exit, or "buy the yacht," as he refers to it.

Getting MBO-Ready

In order to successfully construct a management buyout, the CFO needs an incremental skill set beyond the ability to manage corporate finances. In order to secure the backing of a top-level private equity firm, the CFO needs to have a record of success in improving margins, driving a profit picture and actively participating in growing a company's revenue stream. This last point leads into the first important "soft skill": personality.

"There is a strong tendency for people to put finance in a box," Rickertsen says, "which means that the financial executive that is leading a buyout has to have a broader knowledge of the company." He argues that the executive can and should have broader knowledge of the company, rather than operating in the finance silo. Also, obtaining deep knowledge of marketing and sales channels is essential, and Rickertsen suggests that financial executives voraciously read industry specific buy-side and sell-side research reports.

"If financial executives can develop that knowledge, they can become the most powerful kind of leaders," Rickertsen says. "It's much harder for marketing executives to go the other way, so the CFO is really in the cat bird's seat."

In addition, the financial executive involved in these processes must have strong leadership skills that instill confidence for the staff to follow, and for investors to support. The ability to convey the company's vision to everyone -- from the executive committee to the line workers -- is especially important. That vision and leadership will be the first step in getting through the trial that is an MBO.

Getting the Deal

Once the decision has been made to pursue a deal, executives need to be able to simultaneously manage the company and develop a great deal of information to consummate the purchase. This portion of the process requires a huge time commitment, provided in Rickertsen's Buyout Toolkit. This 11-step reference set includes sample documents, models and schedules that managers will be required to produce during the buyout process. While Rickertsen emphasizes repeatedly that the documents shouldn't be used without professional legal advice, the 134 pages represent the not-inconsequential paper battle that will be waged in the effort.

However, before the legal documents, the management team needs to identify a financial sponsor and a target. In order to successfully secure financing, Rickertsen advises honing the executive summary on the deal and the post-deal strategy down to two to three pages. The summary should give investors the main selling points of the deal, including financials, risks and management bios.

"This needs to be thoughtful, but you can lay out all those factors, as well as why the deal is compelling, in those pages," he says. "It's also very important to have the computer model for the deal, because that will be the governing financial document." This model should show the financial statements for the past five years and the rates of return on equity. The most common mistake that management teams make is to present projections that have no credibility.

"If the market you are in grows at 12 percent annually, then your revenue growth should match that," he says. "Don't show earnings that double every year; instead, show that you are thoughtful relating to the market and your assumptions and you can think of the dynamics of the deal." The most important reason to put together a realistic projection is that the investors will control the board following the deal; miss your numbers, and there's a pretty good chance you'll be fired.

Then come the documents. Among the most important is the letter of intent with the seller. A management team that brings a signed LOT to the table has a significantly better chance of getting funded than a team with no deal in the pipeline. This is because firms know that if the LOI still has to be written, there is a very good chance the deal will get away. "A signed LOT shows that you have a deal in control," Rickertsen says. "That means you can also get a better deal for yourself because it saves the firm so much time and shows a certain professionalism."

In addition to the sample LOI, Rickertsen provides the following samples in the toolkit:

* Management Term Sheet, Summary of Understanding and Employment Agreement.

* Bank Commitment Letter

* Confidentiality Agreement

* Executive Reference Check Form

* Working Group List

* Time and Responsibility Schedule

* Due Diligence Checklist

* Directory of Private Investment Firms

* Directory of Debt-Financing Sources

* The Financial Model

Finally, an important factor to consider before mounting a buyout effort is the exit plan. There are four primary methods of exit: an IPO that paves the way for a stock sale by manager/owners; a sale to a strategic buyer; a leveraged recapitalization; and a sale to another financial buyer. "The key issue on exit strategy is knowing where you're going before you get started," Rickertsen writes. "If you don't have a clear view of how you will exit before you buy your company, you probably shouldn't do the deal. After all buying is only half the fun. It's getting out, and getting liquid -- getting that yacht -- where you can really celebrate."

However, the celebration only comes after years of hard work. Rickertsen makes it clear that if you, as a financial executive, feel unprepared or are unwilling to subject yourself and your company to the inspection that is required to secure ownership via a management buyout, then don't pursue it.

George B. Moriarty is senior editor at the FEI Research Foundation.