Governance 'term sheet' for a buyout.

• Author: RICKERTSEN, RICK
• Position: Management buyout

If you're going to buy your own company, here are key governance issues that you need to get agreement on with your equity partner right at the outset -- while you still have some leverage.

MANAGEMENT BUYOUTS (MBOs) are acquisitions of an operating company or a corporate unit in which the current or future senior management of the business participates as a significant equity partner in the acquisition. They used to be called leveraged buyouts, but this term fell out of favor with the last dance of the Predator's Ball. It is no longer used in the industry, or in polite company, although the concept of leverage is alive and well, under other aliases.

Contrary to popular belief, the buyout industry wasn't started by KKR in the 1980s. The management buyout industry was started early this century when financiers such as J. P. Morgan, Charlie Allen, and John D. Rockefeller used money borrowed against the assets of a target company to acquire a series of companies and build a large business. In those days, the deals were called "bootstrap" deals, but it was essentially the same structure as used today (though in those days they probably paid only three times cash flow!). The buyout business became institutionalized by a number of today's largest and best-known masters such as KKR and Clayton, Dubilier & Rice in the mid-1970s. The private equity industry expanded rapidly through the 1980s. The massive leveraged buyout deal growth of the 1980s, driven partly by Michael Milken's junk bond business at Drexel Burnham Lambert, culminated with the race to acquire R.J. Reynolds for $25 billion in the biggest buyout ever at the time. In 1989, when Drexel collapsed and the debt markets dried up, the industry hit a big bump in the road, and growth slowed dramatically until 1992.

At the time, no one ever expected to see another era of greed" like we saw in the late 1980s. But, to paraphrase Mark Twain, the rumors of the death of the industry were greatly exaggerated. Surprisingly, the stable economic growth of the 1990s led to a resurgence in the buyout industry that makes the deal velocity of the 1980s look like child's play. For example, in 1996 the buyout industry as a whole raised around $18 billion to invest in deals. This was more than was ever raised in any one year in the 1980s. Industry watchers thought this level would never be matched again. Amazingly, from 1996 to today, the dramatic growth has continued. Industry estimates are now that there is...