Corporations and investors interested in acquiring an existing company find that leveraged buyouts (LBOs) are a good way to accomplish their goal. In a leveraged buyout, all the money needed for the purchase consists of a combination of equity and borrowed funds. Both the assets of the company making the purchase and the assets of the company being purchased are used as collateral for what is essentially and asset-based loan. So, how do you know if an LBO is right for your company?

Who Participates in Leveraged Buyouts

Leveraged buyouts are primarily initiated by existing corporations and private equity companies. Existing corporations desiring an increased market share or wanting to enter an altogether new industry often look to leveraged buyouts to achieve these purposes. Conversely, private equity firms turn to LBOs as a way to turn a profit in a limited amount of time. In short, leveraged buyouts are options for many private and public companies and firms.

What are the Benefits of Participating in Leveraged Buyouts

The major benefit of acquiring companies through leveraged buyouts is the fact that very little of the company’s existing capital is needed to secure the loan as the current and future assets of the company being purchased make up the bulk of the collateral for financing. In addition to low capital output, the purchasing company receives a significant tax advantage from tax deductible interest on the debt associated with the LBO financing.

How to Complete a Leveraged Buyout

The steps to leveraged buyouts begin with choosing an acquisition candidate and end with an exit strategy. First, you’ll need to choose a company to purchase based on factors such as stable cash flow, low levels of debt and capital expenditures. Next, you’ll need to calculate the target company’s cash flow as this will be used to pay off the debt associated with the buyout. Then it is necessary to choose a financial structure for the actual buyout which is generally done through an investment bank and involves senior debt and subordinated debt financing. After this, an estimation of the target company’s value is needed so you can make a reasonable purchase offer. This valuation is accomplished via market comparisons and discounted cash flow analysis. Finally, you will need an exit strategy for getting out of the investment with a profit.

While there are many players involved in LBO process, the low capital requirement and relatively simple completion procedure make leveraged buyouts a great choice.