A leveraged buyout is a phrase coined to refer to the use of “leverage” or borrowed capital to buy out a business. The “buyer” completes the acquisition using funds from a lender, which are used to pay the “seller.” The purpose of a company completing a leverage buyout is for strategic or financial reasons, or a combination of the two.
Strategic Reasons: When the “buyer” acquires the new company, the purchaser obtains the assets and liabilities of the company that were sold. For a developing business, the new assets that were gained can be put towards building a strategic position within the industry. This can lead to increased market share and the opportunity to expand into new fields.
Financial Reasons: A leverage buyout is also beneficial to the fiscal health of a company. It can increase operating efficiency, increase a company’s gross margin, and more fully utilize the company’s existing overhead structure. The acquirer can use capital within the acquired business to sustain and improve profit and operating margins. Additionally, as the company grows in size, it becomes more valuable upon an exit.
The capital to finance a leverage buyout is structured based on a multiple of EBITDA, usually around 3.5 times. If the “buyer” is proven and has strong cash flows, then the lender can cover as much as the full amount of the acquisition. It is necessary that the “buyer” have free cash flows for the principal and interest expenses to be repaid without disrupting normal cash flow operations. It is advantageous for your business to find a proficient financial advisor with the familiarity and practice to unite you with the accurate funding routes. The endgame of a leverage buy-out to effect a transfer of ownership through implementation of a transactional structure that will enable strong growth and accountable management. Through using a responsible structure and the right funding partners, this mission is very achievable.
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