Acquisition Financing vs. Leveraged buyouts: Understanding the Capital Stack

Technical finance vocabulary tends to confuse and conflate terms that should be clearly understood. Acquisition financing and leveraged buyouts are two such terms. They both involve a financing transaction as well as an acquisition of something. They both involve large amounts of debt. The main difference between the terms has to do with the type of transaction, the initiator of the transaction and the underlying object being purchased. Leveraged buyouts are a structural approach used by private equity funds to acquire a controlling interest in a company. The goal of the leveraged buyout is to transfer control wherein the purchaser uses large amounts of debt to buyout the owner. Most leveraged buyouts are stock purchases, and the underlying object are the shares of the company. A leveraged buyout is the structural way that private equity firms acquire controlling interests in company. While it is theoretically an acquisition financing, it is rarely described as such.

How Acquisition Financing Drives Strategic Growth

Acquisition financing, on the other hand, is less a structural approach and more a specific debt raise to finance the acquisition of another business. The initiator of the transaction is usually a company, not a fund, and the underlying object is the target company, usually through an asset deal or a stock deal. The primary goal of acquisition financing is strategic growth. Acquisition financing is most used when the owner of the acquiring company is not selling his shares but building share value. Acquisition financing does indeed involve leverage provided by a bank, mezzanine lender or a credit fund. Yet the thrust of the acquisition financing is value building, not ownership shifting. Acquisition financing is used widely by founder-owned companies in scaling whereas leveraged buyouts are used widely by private equity firms in buying ownership. They are different terms describing different scenarios yet complementary in the end. Growth comes through acquisition financing and exiting occurs through leveraged buyouts.