In a management-led buyout, Beaver Theodosakis and his Prana co-founders are taking back the apparel company from Liz Claiborne, with help from private equity firm Steelpoint Capital Partners.

Prana was acquired by Liz for $34.4 million in November 2005 as a first step toward building a coalition of young lifestyle brands that would span the outdoor and action sports cultures. But just five months after the deal, Liz appointed a CEO who promptly ordered a review of 16 of the company’s 36 brands in the wake of declining department store sales.

After seven months of due diligence with 10 bidders, Liz announced it had sold the company back to its co-founders for $40.5 million. Under an earnings payout formula that was part of the 2005 deal, Liz will pay the founders $18.4 million. Theodosakis says he is grateful to Liz executives for the outcome, and adds that the deal marks the end to two frustrating years.

Several of the promised synergies that attracted Prana founders to Liz never materialized. For instance, Prana had planned to expand in Europe through Max, a $1 billion Liz brand with extensive distribution assets. But Max was not prepared to distribute outside brands. Sourcing and retail synergies also failed to materialize, says Theodosakis, who adds that many important projects-including the launch of new web sites-were delayed because of budget cuts tied to reaching quarterly earnings goals. “There was a lot of start and stop,” he says.

Theodosakis spent much of the last seven months reviewing bids and putting together his own proposal. All the distractions slowed sales, which have grown 20 percent since 2004. That growth, and a tightening of financial markets in recent months, caused Prana’s valuation to fall to about one-times annual sales, Theodosakis notes.

The company, however, is poised to rebound. Under Liz, Prana built a rep force of 20 in the U.S. to provide greater service to its 1,100 dealers. Prana also acquired urban outerwear maker Scapegoat, which Theodosakis believes will drive growth in coming years. A bag line and a new travel collection will also spur Prana’s sales.

Prana also recently opened a retail store in Boulder, CO, that serves as a satellite branding hub. The store, which sits atop a dealer showroom, will be used to tell the Prana story to both consumers and core retailers. Thanks to Liz’ hands-off management approach, Prana’s financial accounting departments and other customer-facing operations remain intact.

Theodosakis is looking forward to getting back to what he enjoys most: designing product. He also notes that this episode may be the biggest lesson he learned over the last two years.

“Business needs to be built around people’s lives,” he says. “Don’t let business take you off your life path. When you are doing it for money, or to chase a trend, it does not work. It has to be authentic.”