Recap it! The Founder Buyout. How Founders Can Take Back Control and Investors Get Liquid
For many founders and early investors in a SaaS company, liquidity can feel elusive. While strategic sales and private equity exits are well-worn paths, they often come with compromises, including new leadership, loss of control, and lengthy processes.
But what if the best buyer for your company is you?
A Founder Buyout is an often-overlooked pathway to liquidity that allows founders to reacquire investor stakes, regain control, and position the company for long-term independent growth or a future strategic exit. In this article, we break down how a Founder Buyout works, key financial considerations, and whether it’s the right move for you.
What Is a Founder Buyout?
A Founder Buyout is a structured transaction where the company’s founders (or a combination of founders and management) acquire the equity stakes of outside investors, using debt that is serviced by the company’s own cash flow. This approach provides a liquidity event for investors while allowing founders to reclaim majority ownership and full decision-making control.
Why Consider a Founder Buyout?
Regain Control. Investors often have different risk appetites and return timelines than founders. A buyout removes external pressure and aligns decision-making with long-term company growth.
Avoid Premature Exits. If investors push for a sale before the company is ready, founders may be forced into an unfavorable transaction. A buyout allows them to set their own timeline.
Equity Consolidation. Reducing the cap table complexity can make future fundraising or exits cleaner and more founder-friendly.
Financial Upside. Founders who execute a buyout successfully can reap more significant rewards in future liquidity events rather than sharing proceeds with early investors.
How a Founder Buyout Works
Executing a Founder Buyout requires careful financial structuring. Here’s a step-by-step breakdown:
1. Valuation & Investor Alignment
Before any buyout, founders need a clear understanding of their company’s valuation and investor expectations.
Establish Fair Value: Use revenue multiples, EBITDA multiples, and comparable transactions to determine a reasonable enterprise value.
Investor MOIC (Multiple on Invested Capital): Many investors will have target return thresholds. Founders need to assess whether buyout pricing aligns with investor expectations. If an investor is highly motivated to exit, then the Founders have stronger negotiating leverage.
A buyout is frequently considered as an alternative to an outright sale of the company. In these cases the fair value can be determined by estimating the value of the company in an outright sale. For example, a $5M business with 20% margins expected to grow at 5% annually may receive a 3x revenue multiple in a sale, which can be used as the basis for valuing the company in a buyout.
If the company’s investors had invested $2M at a $15M pre-money in 2021 with an 8% PIK and 1x participation, the cap table may look similar to the below image.
Let’s say the Founders and Investors agreed on a $16.2M EV for the company. The waterfall in a hypothetical outright sale of the business could result in $4.3M in total proceeds to the investors, consisting of $2.7M in preferred proceeds (capital plus PIK) and $1.6M in common participation.
2. Structuring the Buyout
In our example the Founders have agreed to pay $4.3M to buyout their investors. Most Founder Buyouts rely on a combination of funding sources, but the most simple approach is to use a combination of senior and mezzanine debt, which will be serviced by the company’s own cash flow.
Debt Financing – Senior loans, mezzanine debt, or revenue-based financing can provide the bulk of buyout capital.
Interest Rates & Terms – Higher-risk deals come with higher interest rates (8-12%+). Term lengths usually range from 5 to 10 years.
In the above table, we assume the company uses a simple 10-year amortizing term loan at an 11% interest rate. The company also pays $520K in fees to cover legal and advisory expenses. This means that the company must borrow $4.8M to pay the investors $4.3M, which results in a ~21% annualized return for the investors. In this example the company will now have to pay $800K in annual debt service costs.
3. Debt Considerations
Since most Founder Buyouts are funded through debt, understanding leverage constraints is critical.
Debt/EBITDA Ratio – Lenders will evaluate whether the company’s profitability can support debt service. A Debt/EBITDA ratio above 4.5x is often considered high-risk.
Debt Service Coverage Ratio (DSCR) – This ratio (EBITDA divided by debt service) should ideally remain above 1.5x to ensure financial flexibility.
Indeed, our example has resulted in a highly leveraged company as the above pro-forma shows. The 1.3x DSCR leaves very little room for error. The scenario analysis table below shows how DSCR, Investor Return, and Investor MOIC varies depending on the amount of debt (Loan Value) the company takes on to buyout the investors. While providing the full $4.3M in proceeds to investors is possible, it leaves little room for error.
A much better outcome for the Founders is to pay $3M, which results in a 1.8x DSCR and ~10.7% return to investors. The individual deal dynamics will also determine what valuation the investors are comfortable with.
4. Negotiating with Investors
Investors will weigh their options between selling to founders versus seeking external buyers. To gain buy-in, founders should:
Present a Clear Exit Plan: Show investors how a buyout gives them a fair return.
Leverage Any Blocking Rights: Founders have significant leverage if they can prevent an outright sale of the business.
Offer a Competitive Return: If an investor expects a 2.0x MOIC, the buyout should attempt to meet or exceed that return threshold.
Demonstrate Financial Viability: Lenders and investors alike need confidence that the company can sustain its debt load post-buyout.
Is a Founder Buyout Right for You?
A Founder Buyout works best in the following scenarios:
Strong EBITDA Margins: Companies with 15%+ EBITDA margins have more cash flow to support debt.
Misalignment with Investors: If current investors are pushing for liquidity but founders believe in long-term upside, a buyout is an attractive option.
Stable Growth: High-growth startups may be better off raising new equity, but stable, profitable companies are strong buyout candidates.
Common Pitfalls to Avoid
Overleveraging: Too much debt can strangle growth and create financial distress. Just because a bank offers an SBA loan with 1.15x DSCR doesn’t mean the Founders should take it!
Ignoring Investor Expectations: If investors feel shortchanged, they may block the deal.
Lack of Strategic Plan: Simply buying back equity isn’t enough; founders must have a roadmap for long-term value creation.
Final Thoughts
A Founder Buyout can be a powerful tool for founders who want to maintain control while providing a fair exit for investors. However, it requires careful financial structuring, debt management, and investor negotiation. If executed correctly, it allows founders to build long-term enterprise value and ultimately get liquid on their own terms.