There are several options available when a company wants to buy another company. Leveraged buyouts, also known as LBOs, are a common way to purchase a company from another enterprise. This is where a substantial amount of borrowed funds covers the cost of purchasing. In most cases, the acquisition cost is covered by debt and equity in 90% and 10% ratios, respectively. The collateral for the loans is the assets for both the acquiring company and one being acquired.
Benefits and Disadvantages of Leverage Buyout
Before going for this type of funding, the acquiring company must weigh the advantages and disadvantages of LBOs.
When purchasing a company using LBOs, you enjoy investing just 10 to 15% equity. Therefore, you can buy bigger businesses, which would not be the case if the equity required was high.
Investing in low equity and getting more debt increase your chance of getting a higher return on investment.
Some sellers may be skeptical about using Leverage buyouts. However, those who agree to such transactions can sell their businesses at their desired prices.
Easy Finding a Buyer
LBOs allow sellers to find potential customers for hard-to-sell companies.
It’s an Exit Vehicle
Leveraged buyouts allow the seller to hand over a troubled business to someone else.
There is a risk that the target business will be left in a financially tight spot after the transaction. The risk is brought about by the high amount of leverage, which could leave the company with financial challenges, especially if it loses its vital clients.
It can be challenging for the seller to convince a lender to give them the amount required to cover the acquisition costs. In most cases, these loans don’t go through after the lender conducts due diligence.
The due diligence process conducted by the lender consumes a lot of the seller’s time and resources, which could be put into more productive work.
Leverage buyouts can be a perfect way for one company to acquire another. However, before you take the plunge, you need to know its advantages and disadvantages to the seller and buyer. Contact Eagle Bend Capital Financing today to get the best financial help.