A leveraged buyout (LBO) involves the acquisition of a company through outside capital from a lender. A typical LBO can be divided into four separate stages.
Stage 1: Finding the Business to be Acquired
It is simple to say that you want to complete an acquisition, but is much harder to find the one that fits best with your business. It is important to start off by evaluating your own financials and the potential risks that your balance sheet can withstand. If a company takes on too much risk, it can fail. A good acquisition is one that has the capital and equity to grow from the additional assets that are purchased. The assets can be used to produce a new line of business or catalyze a new product or market direction.
Stage 2: Finding the Right Kind of Capital Provider
There are many different types of capital that can be used to complete a leveraged buyout such as, senior cash flow debt, integrated debt, seller financing, asset-based financing, or unitranche debt. Specifically, mezzanine finance is a hybrid debt instrument that lies between senior debt and equity in the company’s capital structure and shares certain characteristics of both. Its advantages include a higher amount of funding and no personal guarantee for the owner, making it an ideal acquisition finance option. Many deals are completed using mezzanine finance.
Stage 3: Receiving the Capital – Due Diligence
For a lender to provide the capital to the leverage buyout, the company must provide sufficient financial information that documents the financial strength of the company. This may include, balance sheets, profit and loss statements, and cash flow statements. The lender will do due diligence to make sure that the assumptions and projections specified by the company are plausible. They will also verify that the underlying transactional data has integrity and that generally accepted accounting procedures are utilized in a consistent manner.
Stage 4: Completion of the Acquisition
Legal documentation of the acquisition is the final stage where the buyer works with his lawyer to finalize the purchase agreement with the seller and the loan agreement with the lender. It is important to ensure that all salient business points are covered in the purchase agreement. The purchase agreement should detail all of the representations and warranties, as well as other key points. The lender is synced into this final stage and will need to review all of the relevant purchase agreements.