Leveraged Buy Outs
At Ison Harrison Solicitors, we have extensive experience in handling and advising on Leveraged Buy Outs (‘LBO’).
We are able to assist buyers on the strategy around acquiring businesses using LBO as a funding option, along with advising buyers and sellers on the possible risks and issues with this model.
What is a Leveraged Buy Out
A Levered Buy Out (‘LBO’) can be best described as a debt financed acquisition. A target business (‘the Target’) is purchased with money ordinarily bought by the Target, or secured against the assets of the Target thus, creating a ‘Leveraged Buy Out’. The borrowed money is then repaid using the future company’s cash flow and/or sale of the Target company’s assets.
Who uses Leveraged Buy Outs?
- LBO’s are typically used by prospective buyers be it, individuals or companies looking to purchase a business. Often, the prospective buyers do not have the funds to purchase the business directly and therefore, are required to borrow finance for the purchase. The financial position of the Buyer is not the only reason why a purchaser would opt to use the LBO model. There are various benefits to a Leveraged Buy Out which are detailed below.
Purchasing a business without having the purchase money
The most obvious benefit of an LBO to a Buyer would be the opportunity to purchase a Business with borrowed money which is repaid once the business has been acquired, using the company’s cash flow to repay the loan or repaying the loan by selling the company’s Assets.
This model allows greater accessibility for individuals and entities to purchase a business’s even if they do not hold the capital themselves to do so.
The model broadly follows the pattern below:
A) The Target company utilises an existing asset such as property, a debt book or other tangible assets against which finance can be raised;
B) Once finance is raised this money is loan to a new company (‘SPV’) who will be buying the shares from the shareholders in the target;
C) Once the SPV buys the shares in the Target from the individual sellers, using the money loaned, there will be a group structure in which there is an outstanding loan between the Target and SPV which is then paid down utilising dividends over the years following the acquisition.
An LBO can be viewed as a risk adverse method to purchase a business if applied correctly. As the business is purchased without using some or all of the purchaser’s personal finance, the purchaser can be more ambitious in buying a Business that perhaps they would not have purchased with their own funds.
On the other side of the spectrum, prospective purchasers often have the opportunity to purchase a Business far beyond the value they would otherwise have been able to if they were only able to use capital they hold at the time of purchase (without the addition of borrowed funds).
As the purchaser is not using all of their personal capital to purchase the business, the return when they are able to start benefiting from the cash flow of the business (once the loan has been repaid) can be greater. Typically, the Buyer’s will ‘sit’ on the business until the loan has been repaid, some purchasers may decide to spend the ‘sitting time’ to remodel the business and make it more profitable so that when the loan has been repaid, the business is more profitable and lucrative within its relevant market. A more profitable business also means the loan can be repaid quicker as the company’s cash flow and Assets may have substantially increased. Selling the business Assets can be particularly fruitful if the Assets appreciate whilst the loan has been repaid.
If you are considering a Leveraged Buy Out, either as a Buyer or a Seller, then we can help structure the deal and advise on the issues relating to this.
Legally Speaking Podcast
In this podcast episode, Partner & Head of Corporate Richard Coulthard discusses the process of buying and selling businesses with some essential tips and advice.
Listen to our new Legally Speaking podcast advising business owners on buying and selling businesses here: