Leveraged Management Buyout

Opportunity:

Are you managing a business that the owner or parent company is thinking of selling?  Or, are you an experienced manager with a proven track record seeking a business to acquire?  Would you like to buy the business yourself but aren’t really considering it because you believe you don’t have enough capital to do so?

Solution:

With less of an equity investment than you might think, you can accomplish the purchase of that business with the right mix of properly structured debt financing.  Make sure you consider all of the following sources of capital:

            For equity:
                        Personal savings
                        Equity in personal residence or vacation home
                        Friends and family
                        Private equity funds
                        Preferred equity from mezzanine capital providers
                        Seller rollover equity

            For debt:
                        Banks
                        Factors
                        Mezzanine capital providers
                        Seller debt

Overview:

There are many owners of later-stage, profitable companies that wish to sell their businesses for a variety of reasons unrelated to the future prospects of such business.  This creates an opportunity for executives to transition from employee to owner and acquire the business.  So long as the Company is generating free cash flow from operations, the executive should be able to utilize debt as a major source of his or her acquisition funds.  This debt, along with some equity and possibly some financing from the seller, will enable the executive to obtain all of the capital needed for the acquisition.

Pitfalls to avoid:

Executives should avoid undercapitalizing the business and leaving themselves unprepared for the inevitable unanticipated event.

Revolving lines-of-credit from banks should be used to finance the Company’s accounts receivable and inventory, not the purchase price of the business.  There must be enough availability under such lines to accommodate the future growth of the business.

Seller financing is an extremely valuable tool provided the Seller agrees to subordinate his or her financing to the other financing of the business.