What Is a Savior Plan?

A savior plan is a type of leveraged buyout plan employed when a failing company's management and employees borrow money to invest in the company in an attempt to save it.

Key Takeaways

  • A savior plan is a type of leveraged buyout plan employed when a failing company's management and employees borrow money to invest in the company in an attempt to save it.
  • This type of plan can fail because of high borrowing costs, which may not be paid back quickly enough to offset high borrowing costs and obtain a return on the investment.
  • Once a savior plan is employed, the company is said to be "employee-owned." Savior plans are more common among startup companies, as startups typically are comprised of a small team that strongly believes in the vision or the mission of the company.

How a Savior Plan Works

While there are many different kinds of leveraged buyouts, a savior plan precedes complete management and employee buyout, which is rare.

In the case of a failing business, employee investors may be saddled with the existing debts and obligations of the business. The potential employee investors may want to carefully perform due diligence to examine whether the business can be turned around and what the major risks are before funneling their money into the buyout. If it's successful, a savior plan can ultimately be extremely lucrative and pay off for its management and employees. Many of the most successful companies in the United States are employee-owned. The largest employee-company in the U.S. is Publix Super Markets.

Typically, savior plans are the least common form of leveraged buyouts, mostly because a failing company will be purchased through leveraged acquisitions by a private equity company. In addition, a failing company will generally require changes in the company's senior management, leadership, and employees.

Other Leveraged Buyout Plans

Other more common kinds of leveraged buyout plans include:

  • The repackaging plan: Buying a public company via leveraged loans, converting it to a private company, repackaging it, and then selling its shares through an initial public offering (IPO).
  • The split-up plan: Purchasing a company, and then selling off different units or parts of it for an overall dismantling of the acquired company.
  • The portfolio plan: Aims to recuperate the company through an acquisition of a competitor, with hopes that the new company is better than both individually.

Pros and Cons of Savior Plans

After a savior plan is put into place, one could say that the company is "employee-owned." This type of plan can fail because of high borrowing costs, which may not be paid back quickly enough to offset high borrowing costs and obtain a return on the investment.

Additionally, savior plans do not guarantee that the company will begin to operate efficiently after the buyout. It often occurs that the savior plan arrives too late to actually save the company.

However, with a savior plan, because the company's management and employees have "skin in the game" with their money, they could be more incentivized to run the business with the goals of increasing profits and market value.

Savior plans are more common among startup companies, as startups typically are comprised of a small team that strongly believes in the vision or the mission of the company.