Important Steps in a Leveraged Buy Out

Posted on: July 3rd, 2018

important steps in leveraged buyout

Determining the Right Price

In any acquisition, there will be a negotiation over price. It is crucial to consult with an experienced individual or company so that your evaluation of the target is an accurate one.

Being armed with a thorough, insightful valuation will prove valuable when finding an agreed upon price.

Structuring the Best Deal through Use of Back ended Payments

Big acquisitions can be daunting when the selling price has to be paid all at once. Make sure to use strategies, such as a seller’s note, to push back payments, easing the immediate strain on your wallet so your company can have some flexibility.

Determining the Growth Strategy

Before an acquisition, there must be a plan. Identify the key opportunities that the acquisition provides. Perhaps the target company can expand into markets where your acquiring company has experience and established connections.

Perhaps you can offer new products to the existing customers of the company being acquired. The growth strategy could look like anything, so long as the logic, strategies, and steps are thought-out in advance.

Finding the funding

Knowing who to talk to and where to look are key for this step. Cash-flow based loans are your best bet for this type of endeavor. Banks usually prefer to give loans for maintaining ongoing operations—it’s less risky.

Plus, cash flow based loans offer more flexible repayment terms and, in most cases, a bigger loan amount.

Ensuring that You Have Financing After the Deal is Done

A common mistake that acquiring companies will make is seeking just enough financing to make the acquisition. Your capital needs extend beyond just the target company’s price tag; you have to fund growth even after closing the deal.

Be cognizant of this when assessing the loan amount required.

Be Wary of Too Much Debt

Most companies do not want to dilute control of their business and therefore are hesitant to raise capital by selling equity. Plus, paying interest on debt is tax deductible to an extent, which makes taking on debt more appealing to companies when they need capital.

However, over-leveraged companies with high amounts of debt on their balance sheet will run into trouble when trying to invest in growth. Be sure to consult an expert so that your debt is structured optimally, giving your company one less thing to worry about.