How Does a Manager Buy the
Business He/She is Managing?

The recent announcement by Dow Chemical that it fired one of its senior executives and one of its senior advisors for being involved in unauthorized discussions with third parties about the potential acquisition of the company raises the question of how a manager of a business goes about trying to buy the business he/she is managing. The short answer: very carefully. The Dow case is the subject of litigation and the two affected individuals are disputing Dow’s claims. Nevertheless, while we don’t know all the facts, this situation does provide a real world illustration of how sensitive a subject this can be.

The cartoon depicts one possible outcome. In fact, it depicts something that actually happened in the chemical industry. A Division President at a large chemical company wanted to buy the division he was running. He felt that the division could be much more profitable if he was given free reign to do as he saw fit and if he did not have to deal with what he felt was a suffocating corporate bureaucracy (not an uncommon feeling in large corporations). So he went to the CEO and expressed his interest. The CEO expressed an interest in receiving an offer and then proceeded to fire the Division President. The Division President went on to make an offer for the division after he was fired, but a deal could not be agreed on and he went on to a career outside of the chemical industry.

When a manager wants to buy the business he/she is running, there is an obvious conflict. The company wants the manager to maximize profits and the manager wants to get the business at the lowest possible price. How does the company know that the business is being run to maximize profit when the
person running it is trying to buy it at the same time?

In the real-life situation depicted in the cartoon, was the Division President being punished for his honesty? Or was he being punished for his dishonesty? If he had been working in secret for several months before talking to the CEO, then the CEO might rightfully feel he was not doing his job, and infact, the Division President might actually have been intentionally sandbagging or underperforming in order to set the stage for a low offer. If, on the other hand, the Division President came to the CEO early on, very soon after he came up with the idea, then firing was perhaps not justified. It’s obviously a delicate situation.

Here are some guidelines that a company and a manager
might want to follow under circumstances like this:

  • A manager should be open and honest about his/her desire to buy the business.
  • He/she should express this desire very early, before doing any real leg work (such as talking to financial backers, private equity groups, lenders, etc.).
  • No confidential information or plans should be disclosed to any third party without the consent of the company.
  • The company and the manager may want to arrange for a short window of time during which the manager is given the opportunity to put together an offer. This may be coupled with putting the manager on a leave of absence or having someone else run the business in the interim.
  • The company should not conduct an “auction” process for the business it wants to sell if the manager is one of the potential buyers. The manager is needed to help sell the business. You can’t help sell something and try to buy it yourself at the same time.
  • The company might consider giving the manager the right to make an offer either first, before an auction process is undertaken, or last, after seeking out other potential buyers.

There are no easy answers. Every situation is different. The two key objectives:

1. minimize the conflict of interest.
2. don’t punish an honest desire by a manager to buy the business.