When completing a leverage buyout, there are several key participants that are involved to accomplish the deal: the buyer, the seller, and the lender.
The Buyer: The buyer is the company that is acquiring the other business. The buyer must have strong cash flows and equity base that can handle the principal and interest cost that will come along with the capital provided. A buyer with a predictable EBITDA is a good LBO candidate because that company has the ability to cover the debt service. A history of high performing EBITDA track records is a great sign to a lender and makes completing any deal much easier.
The Seller: The seller is the business that is being acquired by the company. It is important that this business is properly valued so that the assets and liabilities of the company are paid for given the right price on the market. If a company is sold for more than its actual value, the acquisition has the potential for failure. Sellers in the middle market are usually an important part of the leadership team. The buyout structure must be set up in a way to make sure he seller has incentive to ensure the business prospers over the short term and the long term.
The Lender: The lender comes in all different shapes and sizes. The capital can be provided in highly structured forms such as, senior cash flow debt, integrated debt, seller financing, asset-based financing, or unitranche debt. The loan is most often based on a multiple of the company’s EBITDA, usually about 3.5 times it.
The Advisors: Often, buyer and seller have advisors to make sure they are both getting a fair deal. There is often an investment banker involved to bring the financing to the closing table.
A leverage buyout can only be completed if there is total agreement between all parties involved. Until buyer, seller and lender understand the terms of the buyout, a leverage buyout cannot be completed. An experienced financial advisor with the expertise and knowledge of how to successfully complete a leverage buyout can be very beneficial to the deal. The advisor will also have access to different capital sources to finance the buyout.