How Does a Leverage Buyout Work?
The leveraged buyout, also known as an LBO, is a commonly used business practice that can benefit both sides of an acquisition.
What is a Leverage Buyout
A leveraged buyout refers to a financial transaction that is used to acquire a company using debt and a small percentage of equity from the buyer. An LBO transaction typically aims to use about 90 percent debt and 10 percent equity. Thus, the debt is highly leveraged. A buyer could be the current management team, the company’s employees, or a private equity firm.
What is the Purpose of a Leverage Buyout
A leveraged buyout enables a buyer to acquire a company without using a significant amount of capital. The purposes of a leveraged buyout include:
Taking a public company private to make it stronger and more marketable, and then returning it to the market.
Breaking up a large company that has become inefficient in the marketplace and then selling off the smaller entities to other companies.
Improving an underperforming company.
Getting acquired by a larger company helps the smaller company be more competitive due to operating or strategic synergies.
How Does a Leverage Buyout Work
A smaller leverage buyout is often financed in one of three ways. First, seller financing keeps the seller involved in the business because part of their compensation is held until long after the sale, so the business’ performance is likely to be more accurately represented. Second, the SBA backs loans that offer better credit requirements compared to conventional loans. And third, conventional loans can also be used.
A mid-sized or large leverage buyout frequently is executed in one of three ways: First, using senior debt which takes precedence over other debt. Second, mezzanine and subordinated debt can be used, as secondary to other debt. And third, seller financing can be used.
Seek Expert Financing Assistance
Contact Atlas Capital Solutions, for expert financing solutions. Our team of seasoned professionals helps businesses and entrepreneurs navigate the alternative financing landscape to get the funding that they need to grow.