Leveraged Buyouts by the Book

One of many types of management transfer deal structures is the leveraged buyout (LBO). From the book Private Capital Markets by Robert T. Slee, leveraged buyouts typically use a relatively small amount of equity in the deal’s capital structure. LBOs rely on some equity by management and layers of bank and mezzanine debt to make the acquisition.

An LBO is designed to maximize the leverage of the management’s equity contribution, which is sometimes only 10% of the total capital required. Management teams negotiate simultaneously with both secured and unsecured lenders. A seller note is usually the last piece of the structure to be determined because most sellers will not voluntarily finance a meaningful part of the structure, as they are in a second or third security position. The seller financed part of the deal is essentially assuming equity level risk while receiving only debt returns.

Sellers who finance deals may want to protect themselves by financing less than 50% of the transaction; requiring the buyer to obtain life insurance naming the seller as beneficiary for the amount of the loan; making sure the buyer has adequate bank financing for operations; receiving a personal guarantee from the buyer; limiting the note to 60 months; and making sure the agreements among other lenders allow for continued payments on the seller note, unless a major covenant is tripped.

An LBO structure that is too highly leveraged may fail with unexpected losses or cash shortages. Management’s performance after the transaction is key. Managements structure deal terms to defer payments with such instruments as interest only loans for an initial period of time. They also negotiate preferred payment terms with vendors and attempt to speed up payments from customers.

In an LBO, managements trade additional deal risk for an increased equity interest, allowing managers to obtain control of the company with very little of their own money.

Are You Hanging With The Wrong People?

Is the drumbeat of negativity blaring from local media these days influencing decision making by corporate leadership? Are we missing opportunities to hire good people and invest in future business growth because we are hanging out with the wrong people? We seem to be getting our advice from “entertainers” who would be hard pressed to tell you the difference between a double dip recession and two trips to Dairy Queen. How can CEOs counter the negativity regarding the economy?

One suggestion would be to turn off the local TV news and eliminate talk radio from your macro-economic diet. Replace the talking heads and talking radios with some good old fashioned Positive Mental Attitude gurus. With a little low technology help Earl Nightingale, Norman Vincent Peale and Napoleon Hill could easily replace Sykes, Belling and Beck.

Or, start hanging around with TEC members like Frank Romano, president of HAR MAR Development Corp. Frank bought the old Lake Park golf course in Germantown a few years ago, with the vision for improving the golf facilities and developing the property. After a slow start, condos to west of the golf course – now named Blackstone Creek – are being built by a third party and starting to sell. And now Frank has preliminary drawings for a new club house with a serious banquet facility.

Oh yes, there are also plans for a health club and a spa, a bank, a restaurant or two, higher end retail stores, some real nice office and professional buildings overlooking the golf course and an apartment or two situated around the first tee. The village of Germantown could have a very cool chunk of green space right on the corner of the property for their farmer’s markets and other local events.

If you would prefer to hang with guys like Frank, give him a call at 262-573-3124 or send him an e-mail at fromano2471@aol.com. He is interested in hanging around with a few people who might share his vision and passion for the future of his Mequon Road property.

As Zig Ziglar was fond of saying, "business is neither good or bad out there." Then, pointing to his own head, he noted, "business is only good or bad up here."

Local School Board Model - Broken

The July 1st issue of North Shore Now included a report that the Fox Point Bayside School District School Board voted in favor of a budget that increased spending by $2.2 million. An astonishing increase of 14% in the face of declining enrollment. While most people outside of government have learned it is fiscally prudent to figure out how to live within one’s means, the School Board is off spending other people’s money as if the people serving on the Board had lost all common sense. And we thought MPS was out of control.

It is becoming clear that the model of local school boards with local control and taxing authority is broken. The School Board is beholding to the powerful and well financed teacher’s union. The Board responded to the voting parents in the district with kids in the schools, garnering more subsidies for about 900 students. (In the interest of full disclosure, I had three children benefit from the largess of previous Boards). Unfortunately, no one is representing the interests of the taxpayer.

While the local school board model is broken, it will take a long time to replace it with something that works for all constituencies. In the meantime, the alternative is to restrict their access to money. The Taxpayer Bill of Rights has been effective in this regard in states like Colorado, even though the entrenched special educational interests continue to peck away at it. It is time to reign in tax and spending machines like the Fox Point Bayside School District. It is time to reconsider TABOR