After 30 years investing in private companies, I’ve come to believe something.
Most founders know who should run their business next. They know who stepped up when the
company was struggling. They know who employees trust. They know who customers call first
when something goes wrong. They know who consistently makes good decisions without
seeking recognition. The challenge usually isn’t identifying the next generation of leadership.
The challenge is creating a path for the next generation of leadership to become owners.
Baby boomers own roughly 2.3 million businesses that support more than 25 million American
jobs. Millions of those founders are beginning to think seriously about retirement, liquidity, and
succession. Many have children who have chosen different careers. Others simply aren’t
interested in passing the business to family.
A business is more than a financial asset. For many founders, it’s decades of relationships,
sacrifice, and purpose. Choosing the next owner isn’t simply a financial decision. It’s one of the
most important leadership decisions they’ll ever make.
For many owners, selling to a private equity firm, a strategic buyer, or a competitor feels like the
only realistic option. But I believe too many founders begin by asking the wrong question.
Instead of asking, “Who will pay me the most?” they should first ask, “Who should own this
business after I’m gone?” Those answers are not usually the same.
Many founders have spent decades building exceptional leadership teams. They have a COO
who helped scale the business, a salesperson who became president, or an operations executive
who knows every employee by name. These are the people who helped create the value the
founder is now preparing to sell. They are capable of writing the company’s next chapter.
The obstacle is not leadership.
The obstacle is capital.
Capital shouldn’t determine who is capable of owning a great business.
Most management teams cannot write a check large enough to acquire the business. ESOPs can
be an effective solution in certain situations, but they require significant leverage if the founder
wants substantial liquidity upfront. As a result, owners frequently dismiss the idea of a
management buyout before the conversation ever begins.
There is another reason the conversation rarely happens. An investment banker is hired to
maximize transaction value by running a competitive auction. That is exactly what a good
investment banker is supposed to do. But once an auction begins, every conversation naturally
revolves around valuation, deal terms, and competing bids. The broader questions many founders
actually care about rarely enter the discussion.
- Will my employees have the same opportunities?
- Will my customers be treated the same way?
- Will the culture survive?
- Will the company I spent decades building continue to reflect the values that made it
successful?
For many owners, those questions deserve as much attention as purchase price.
If management can’t afford to buy the company, is there another way to structure the transition?
We believe there is. In fact, we’ve spent years thinking about exactly that question.
Our objective is simple: provide meaningful liquidity for the founder without burdening the
business with acquisition debt, while creating the next generation of owners.
There are many ways to structure a successful ownership transition. One approach we’ve
developed at Mauloa looks like this.
For example, assume your business is worth $50 million.
-Mauloa acquires 75% of the company for $37.5 million.
-The founder receives $37.5 million in liquidity while retaining a 25% ownership stake
worth $12.5 million.
-Management participates in a long-term ownership plan representing up to 40%
ownership, earned over time through leadership, performance, and the long-term success
of the business.
-Over time, the founder’s remaining ownership is acquired through a pre-agreed transition
structure.
-Throughout the transition, the operating company remains debt free.
The exact economics will vary from company to company, but the objective remains the same:
create liquidity for the founder while creating the next generation of owners.
Every company is different. The principle is the same.
I believe every founder owes it to themselves to understand every option before beginning a sale
process. Most founders spend decades building a business. Very few spend the same amount of
time planning how to leave it. Once a sale process begins, it can still be stopped. But it rarely is,
because by then everyone involved is focused on maximizing price.
So before you make the first call, take a step back and think about what success actually looks
like.
If success means maximizing price, an auction will likely be the right answer.
If success also includes preserving culture, rewarding the people who helped build the business,
protecting employees, and creating the next generation of owners, there may be another path
worth exploring before beginning a formal sale process.
Not every business is right for Mauloa, but every founder deserves to understand all of their
options before beginning a sale process.
If you’re beginning to think about succession, we’d welcome the opportunity to share how we’ve
approached this challenge with other founders.
The best buyer may already work for you.