Buyout: The Insider's Guide to Buying Your Own Company


Successful management buyouts (MBOs) are the pinnacle of business success today and a great way to earn an ever-increasing stake in the American dream.

Buyout provides managers and executives with the necessary tools and strategies for leading a company or division buyout. It explores the details of the entire buyout process and empowers managers to seize their destiny and take charge. Managers learn how to:

? Find a company to purchase

? Develop a business plan

? Negotiate with...

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Successful management buyouts (MBOs) are the pinnacle of business success today and a great way to earn an ever-increasing stake in the American dream.

Buyout provides managers and executives with the necessary tools and strategies for leading a company or division buyout. It explores the details of the entire buyout process and empowers managers to seize their destiny and take charge. Managers learn how to:

• Find a company to purchase

• Develop a business plan

• Negotiate with the seller

• Win the ""ground war"" of due diligence

• Find equity partners and negotiate the management deal with investors

• Run the company after the MBO.

Buyout offers real-life stories of people who actually pulled off out-of-this-world deals and became rich beyond their wildest expectations.

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What People Are Saying

From the Publisher

"""Rickertsen is one of America's most gifted buyout experts. Anyone interested in an inside look at the buyout world and the opportunities for managers in these deals will learn volumes from this book.""

--Jack Kemp, Empower America

""Only insiders know how this stuff works. Rickertsen is an insider. He brings the complexity of high finance to its knees and leaves it begging for mercy. He explains its inner workings so that even a journalist can understand them.""

--Michael Lewis, author of Liar's Poker and The New New Thing "

Bill Marriott
Bill Marriott, Chairman, Marriott International, Inc.
Rickertsen is one of American's most gifted buyout experts. Anyone interested in an inside look at the buyout world and the opportunities for managers in these deals will learn volumes from this book." Jack Kemp, Empower America Rickertsen has written a must-read for every manager with the dream of buying and running his own company.
Michael Lewis
After reading Rickertsen's insider view on leveraged deals, no one in America will want to work for wages again." David Bonderman, leading global investor and founder of the Texas Pacific Group. "Only insiders know how this stuff works. Rickertsen is an insider. He brings the complexity of high finance to its knees, and leaves it begging for mercy. He explains its inner workings so that even a journalist can understand them.
—(Michael Lewis, author of Liar's Poker and The New New Thing)
Terrence Lapier
Dr. Terrence Lapier, Entrepreneurship Faculty, The Wharton School
Likely to become the essential manual for management buyouts. This high-impact book will be required reading for every entrepreneurial-minded MBA, manager, seller of a company, and professional in the buyout and M&A businesses.
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Product Details

  • ISBN-13: 9780814431719
  • Publisher: AMACOM
  • Publication date: 4/6/2001
  • Pages: 400
  • Sales rank: 690,540
  • Product dimensions: 6.00 (w) x 9.00 (h) x 0.82 (d)

Meet the Author

"Rick Rickertsen (McLean, VA) is the COO of Thayer Capital and the founding partner of Thayer's two corporate buyout funds totaling over $1.2 billion. In his fifteen-year career in the management buyout world he has led more than 50 buyouts, including the Ritz-Carlton Hotel Company, SAGA Software, ePlus, Iconixx, Immedient, and IESI. Robert E. Gunther is founder of Gunther Communications and is the coauthor of numerous books.

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Read an Excerpt

Excerpt from Chapter 1:

The American Management Dream

On April 1, 1997, a smiling Dan Gillis, president of the American division of Software AG, stood on the front stage of a large ballroom at the Hyatt Dulles in Reston, Virginia. Hundreds of Software AG employees packed into the conference room, while others listened in on global conference calls from sites across the United States, Japan, and Israel. Employees arrived early. It was standing room only, a first for an employee meeting of the U.S. division of the German software maker since Gillis was named president in May 1996. In a memo to employees the week before, he had told them only that the meeting was for "an update of our progress" in the first quarter along with a few "special announcements." But there was an air of nervousness and uncertainty in the room. They knew it was much more than a simple update. But was it good news or bad?

There had been a lot of speculation. Employees of the U.S. division were aware that their German parent was losing money and wasn't producing new products. Morale was low and turnover had risen to 40 percent. Too many financial types were working late hours. There were endless closed-door meetings and hosts of lawyers and other "suits" swirling in and out. Rumors raced through the hallways of the Virginia headquarters that the company was on the block. At one point, it looked like SAP might buy the German firm. Maybe Oracle would buy it. Then the word spread that Gillis was firing his entire executive staff. Worst of all, there was a rumor that Computer Associates would be the acquirer, a frightening prospect that would have meant the loss of probably 60 to 80 percent of their jobs. Most people were sure the news could only be bad.

So now, as the lanky president stood at the front of the room and joked that he hadn't brought them together to discuss the dress code, there was a sense of nervous expectation. After a few opening remarks, Gillis put up a slide stating: "Software AG has now become an independent software company." There was a half-second of stunned silence. After all, it was April Fool's Day. Could this be a joke? Then the entire room filled with applause. "As of yesterday, we signed all the papers and became an independent software company," Gillis said, pausing between each of his last words to savor the victory and allow the concept to sink in.

As Gillis described the deal and answered questions, he kept driving one point home: The company was now the master of its own destiny. "The key point is our success now is totally dependent on us," he told them. "I think in the past, we tended to look for excuses, and we could point to our parent company as an excuse. It is no longer an excuse. There is a tremendous upside here, but there is also a tremendous responsibility. We control our own future now. And that feels really good to me. How about to you?" Robust applause and wide grins, with just a hint of nervousness, reflecting the trepidation of cutting loose from the mother ship.

But for a company that had always waited to see what headquarters in Germany would say before proceeding, it was a hard message to absorb. Toward the end of the Q&A session, a question came in over the loudspeakers from an employee in Seattle. Gillis had told employees that the buyout would allow the U.S. company to pursue its own software development and acquisitions. The caller asked, "Are we constrained in any way from acquiring or selling technologies that may fit our market but not Germany's?" In answer, Gillis pointed to the overhead and read, "Independent software company. Thank you." After the exhilarating applause died down, he continued, "We are in no way constrained in our strategy. No way. We can set our own strategic direction and it is our own. Nothing can stop us from implementing it. That's got to sink in, doesn't it? I think that's the power of this. That's really what's happening."

He paused. "What do you think—is this a great announcement or what?"

As he listened to the applause, even Gillis didn't know at that point how great an announcement it really was. None of us knew.

Banging the Gavel on the NYSE

The announcement was the culmination of months of nonstop labor by Gillis and CFO Harry McCreery to make their dream of ownership a reality. They had maneuvered a multinational minefield of complex and vexing issues to hit a target the size of a pin. They had worked with our private equity firm to put together financing for the deal and hammered out an agreement with their German parent in an incredibly tight time frame driven by the parent company's German banks. Gillis and McCreery had managed to cut the company loose and saddle it up.

"[Many] folks were very doubtful that we could do this at the beginning," Gillis told the employees. "The Germans were doubtful. We were doubtful sometimes. There were so many complex pieces that all had to come together."

They had a challenging road ahead, but it would lead them to one of the most successful management buyouts (MBOs) ever. Net income more than doubled from 1996 to 1997, and revenue increased 16 percent to $181 million. Gillis and his team put in place a bold new strategy to rapidly grow through strategic acquisitions and by developing highly complex middleware, which links legacy mainframes to distributed computing networks and the Internet. Turnover among the employees plummeted as more than eighty employees received stock options for the first time, and morale shot through the roof in the glow of their independence. Customers and suppliers could feel it, too.

Just a little over seven months after completing the deal on March 31, their initial public offering (IPO) reached $10 per share at the close of trading, which meant that the $1 million stake invested by the manage ment team already was worth more than $40 million. Gillis and McCreery, who seven months earlier had been division managers, were now on CNN, wealthy beyond their dreams and captaining their own ship. Gillis was seen by millions on TV doing something that even the most powerful corporate chieftains can only dream about: He was grinning above the floor of the New York Stock Exchange (NYSE), banging away with the gavel to close trading. How did they possibly get there?

The American Management Dream

It began with the dream of a "peddler" and a "beanie." In McCreery's view, the world of Software AG was divided into "techies," "beanies" (i.e., the financial bean counters), and "peddlers" (i.e., marketing types). Gillis was the outsider. He came to the company in January 1995 after another firm acquired Falcon Microsystems, where he served as executive vice president. Gillis became senior vice president of sales at Software AG and was named president in May 1996. McCreery chided Gillis by calling him "a peddler." Gillis wasn't slick but was a hard-driving and straight-shooting Rhode Islander—a creative leader with the vision to dream the big dream and the persuasiveness and persistence to make it happen. His simply adorned office is dotted with photos of family, along with pictures of himself with visiting luminaries such as Steve Forbes, George Bush, and Colin Powell. Beneath an exterior as polished and soft-spoken as a private school headmaster is an unexpected passion. It showed itself in the MBO and in his one indulgence that followed his newfound wealth: a sleek, black Mercedes 500 sedan with plates reading AGS (his NYSE ticker symbol). He is justifiably a little proud of this achievement.

Gillis grew up in Providence, Rhode Island, the middle of five children, son of a railroad bridge foreman. He attended private schools and earned a BA in management from the University of Rhode Island before hitting the streets as a salesman for Kodak. He had a distinguished two-decade career in the computer industry, working at IBM, Exxon Office Systems, and Wang. In his last job prior to Software AG, Gillis had helped grow Falcon's revenue from $13 million to more than $180 million before the firm was sold.

McCreery was the insider, who had worked at the company for a decade and understood what made it tick on both sides of the Atlantic. He is a beanie, the complex-deal strategy guy who can run the numbers through their paces and make them dance. He has the studied cynicism and appearance of a tough Chicago cop. (He later commented on the buyout, "I just did what needed to be done, same as I always have, just with a more rewarding result.") This gruff attitude is tempered with an easygoing rapport and pervasive sense of humor. Above all, he is a contrarian. In a sea of high- powered European machines in the Software AG Americas (SAGA) parking lot, his is the lone GMC pickup.

As a kid, McCreery wound transformers in his father's shop in Chicago. He served as a gunner and mechanic in Vietnam, and when he returned, he ran a service station before earning his accounting degree at Walton College and earning his CPA. After cutting his teeth on the books at A.B. Dick, he served in senior executive positions with high-tech companies such as Syquest Technology, Automated Microbiology, and MAC Associates. He had led turnarounds and worked on half a dozen start-ups. He thought he had put that life behind him when he started with Software AG—until this deal came along.

About the only thing Gillis and McCreery had in common was that they both had served in Vietnam, where they had demonstrated their stamina and ability to hang tough under fire. And they were back in the foxhole again. They appeared to be an unlikely combination—in their professional backgrounds, appearance, and personalities. But they proved to be the perfect duo, because their differences gave them the complementary aptitudes and attitudes needed for success.

Gillis and McCreery had built SAGA into a successful firm—doubling profits between 1995 and 1996. But their German parent was in deep financial trouble, so it looked as if their reward for their successes might be a German bankruptcy or an acquisition that would dismantle the firm. It looked like a dark time. On the other hand, they thought, this might be the moment they were waiting for. It could be the opportunity to do more than run the company. This might be a chance to own it.

The Opportunity Presents Itself

About five months after becoming president in 1996, Gillis was standing on the other side of a table in Darmstadt, Germany, in Software AG's austere boardroom, staring down Dr. Peter Schnell. Schnell was the brilliant and mercurial technologist who had founded Software AG twenty-five years earlier. Schnell had built it from a start-up to a leader in mainframe database technology, driving revenue above $500 million by 1989 and becoming one of the wealthiest men in Germany. At one point in the 1980s, he was the king of German technology, with a company as large as Microsoft and bigger than SAP—and an ego to match.

Schnell, however, made the mistake of dismissing client/server systems and relational databases as inefficient computing platforms, and so failed to develop new products for these fast-growing segments of the market. From 1989, as global software continued to explode, his company's revenues flatlined. High overhead and unfocused, dictatorial management created inefficient operations that were bleeding red ink. These years of missteps helped bring the company to the brink of bankruptcy.

Gillis was in Germany for a monthly meeting of the executive committee. As he leaned across the boardroom table, he told Schnell that the company was going to lose DM 57 million. Schnell, who refused to admit there was a problem, went ballistic. He ran up and down the table, yelling at Gillis. "The partners and managers knew I was right, but nobody would tell this guy," Gillis said. Schnell was in denial and the company was cratering. Iceberg? What iceberg?

It was now October. Gillis knew they had a limited window of opportunity in which to act. He knew that their cash-strapped and hemorrhaging German parent would probably need to sell off assets to pay off debt coming due in April 1997. He knew that there was a good chance the company would go on the block, and that he wanted to be the buyer. If anyone was going to own this company, it would be them. But how do you acquire the $160 million division of a large German software company that is lurching toward death? It's no small order.

Back home after the October meeting, Gillis called McCreery and controller Gary Hayes together. "Look guys," he said. "This is not going to continue this way. One of two things is going to happen. The Germans will probably bring in new management that will demand we make more money, so we might as well start making more money and get ahead of the curve. And number two is, if we make some money, maybe we can buy this place. Nobody is going to be interested in it in the condition it's in now, so we've got to shape it up as fast as we can."

McCreery had frequently contemplated the possibility of buying the company, but it had always looked pretty unlikely. The German leadership would have to be pushed to the wall to part with its U.S. division. The U.S. software market was the fastest-growing and most sophisticated in the world. They wouldn't let it go unless there was no choice. Now there was no choice, but the deal was still a long shot. "It was finally clear they were going to hit the wall and there would be a five-day window of opportunity," McCreery said. "If you could key it up and the stars aligned, it could work-so it wasn't crazy, but it was pretty far-fetched at the time. The Germans just don't sell stuff."

Management also needed to find a financing partner who would wait in the wings for the time to be right, then pull the deal together almost overnight. "This [was] buying a rather old company from a German parent," said McCreery. "And you had to find a buyer who was politically correct to the Germans, which rules out 95 percent of the people capable of financing a deal that size. We knew the Germans would want a simple deal, quick, get it over with, no gaming and no arguing. You really had to bring the buyer and seller together and you had one shot. It had to be a match made in heaven."

Gillis held his tongue at the executive meetings in Darmstadt, but he kept working on his plans. After the October meeting, he asked a board member to approach Schnell privately about selling the U.S. firm. He thought it was an astute and politically correct way to approach Schnell, but the word came back quickly: "No way." The German board, finally aware of the magnitude of the problems, had already decided to take the rare and dramatic step of replacing the founder. Schnell had been forced out and a successor was quickly named, but he had not yet taken the reins. Gillis would have to bide his time a bit longer. "They were in a position where they had to raise capital," Gillis said. "They had to sell an asset. They had all the physical assets tied up with the bank. So the only thing they could sell was something of value, which was us." ...

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Table of Contents



1. The American Management Dream

2. No Guts, No Glory

3. Avoiding Deal Hell

4. Find or Create Your Opportunity

5. Strategy for the Business

6. The Deal with the Seller

7. Show Me the Money

8. What’s in It for You?

9. Preparing for the Ground War

10. Riding the Tiger

Appendices: The Buyout Toolkit

Appendix A: Management Term Sheet and Summary of Understanding

Appendix B: Letter of Intent with Seller

Appendix C: Bank Commitment Letter

Appendix D: Confidentiality Agreement

Appendix E: Executive Reference Check Form

Appendix F: Working Group List

Appendix G: Time and Responsibility Schedule

Appendix H: Due Diligence Check List

Appendix I: Directory of Private Equity Investment Firms

Appendix J: Directory of Debt Financing Sources

Appendix K: The Financial Model--A More Detailed Look


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