Combining entrepreneurial ambitions and shareholder value
A Leveraged Buyout (LBO) is the acquisition of a company by a small group of investors. It is called ‘leveraged’ because most of the acquisition price (50% or more) is financed by borrowing. The amortisation of the debt is typically scheduled within a period of less than ten years, using the cash flows generated by the company or the sale of disposable assets.
When the small group of investors is made up of managers from the company itself, the operation is referred to as a ‘Management Buyout’ (MBO), a very common form of LBO. If it is composed of managers from another company, the operation is called a ‘Management Buy-In’ (MBI).
Financing sources
The financing structures available in an LBO are extremely varied, depending on factors such as the company’s track record, the sector in which it operates its relative market position and prospects, and -most importantly- the sustainability of future cash flows. The financing structure typically consists of:
- Senior debt: subordinated and non-subordinated debt (bank term loans, bond issues, etcetera)
- Working capital: revolving facilities to finance the company’s working capital swing
- Mezzanine: hybrid financing ranked between senior debt and equity-/ vendor loan
- Vendor loan: the vendor can grant (subordinated to the bank) terms of payment to the buyers
- Equity: relatives and associates of management, investing partner(s), venture capitalist and private equity etcetera
Once the deal has been concluded and the new financial structure is in place, the new management aims to capture and secure maximum (free) cash flows in order to repay the debt incurred and maximise the value of the company.
You will find more information at the MeesPierson Corporate Finance & Capital Markets website.