Leverage buyouts are occasionally announced in the news media, sounding like something that is earth-shaking or even dreadful. It is neither of those. Nor are leverage buyouts accomplished easily or on a whim.

Leverage buyouts (LBOs) are simply business transactions where a company is purchased by another company using a significant amount of debt. The acquiring company uses its assets as leverage and the assets and cash flow of the company being acquired are used as collateral and to pay for the cost of financing the purchase.

Why Do Companies Use Leverage Buyouts?

Leverage buyouts are used for many purposes including taking a public company private by consolidating public shares and transferring them to a private investor who will take the shares off the market. This can help a company “repackage” itself to go back onto the public marketplace as a stronger entity. Other reasons include breaking up a large company to make the smaller new entities stronger and more efficient. Leverage buyouts can be used to acquire a competitor, or simply as an exit strategy for owners to cash out a business.

What Makes a Good Leverage Buyout?

Good leverage buyouts have all or many of these characteristics:

Stable and predictable cash flow.
A strong asset structure.
The potential for enhanced operating and financial efficiency.
Minimal capital expenditure requirements for a purchase.
A clean balance sheet with low debt.
A strong market position.
A business with proven management
Some viable exit options.

How Are Leverage Buyouts Financed?

Smaller leverage buyouts, those under 10 million dollars, are typically financed using seller financing, SBA-backed loans, conventional loans, and small investor financing.

Mid-sized and large leverage buyouts use investment banks and private equity firms to arrange the transaction using three types of debt: senior debt, mezzanine financing, and subordinated debt, and seller financing.

Seek Expert Financing Assistance

Contact the financial experts at Diamond Capital Financing, based in New York, to help you achieve long-term business growth and success. We can help you secure appropriate funding to meet your business’s financial needs.