Regulators from time to time mandate corporate spin-offs for antitrust reasons. For instance, if two coal companies merging would cause their combined revenue or market share to eclipse acceptable antitrust thresholds, the approval of the merger would be contingent upon spinning off certain mines to a third party.
The regulatory divestiture typically presents a buyer with a good deal, as the sale process is typically extremely hurried so as not to delay the proposed merger. The most successful private equiteers often possess high degrees of specialization , and for that reason, can add tremendous value to the organizations that they acquire. Such a business is an attractive LBO candidate to a buyer that is confident in its ability to more efficiently operate the company and survive the debt burden.
This qualifier is especially pertinent today as baby boomers retire in the United States and leave healthy businesses lacking heirs.
Private equity firms typically love these companies as they present opportunities to acquire a high quality business that needs minimal help, but comes with an owner that simply wishes to cash out. Sometimes businesses with attractive long-term earnings capacity are held hostage by a poor underlying industry or economy, causing deflated trading prices and valuations.
Such opportunities are attractive, offering a chance to buy companies for cheap before an expected rebound in the market price. Bottom line: understanding how private equity firms screen for and think about LBO feasibility is exceptionally beneficial to advisors evaluating which assignments to take on, entrepreneurs thinking about who to sell to, management teams considering an MBO , and corporations evaluating which buyers will be interested in purchasing their non-core divisions.
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Knowing about these factors in advance would help in planning the cash outflows. A target company with low debt would mean few commitments to pay off the loans. If the company already has debt on its balance sheet, it would make the deal risky as there is already cash outflow. This situation would make it challenging for raising more debt which is a requirement for the leveraged buyout.
Therefore for a good leveraged buyout there is a requirement of a candidate with no or little existing debt so that the cash flows can be primarily used to pay off the principal and interest due on the debt to be taken. Is it important that the target business has products which are well established in the market and keeps generating cash flow to maintain a good position in the market.
This will make sure that the target company will not be affected after the LBO and make the cash flows less prone to risks. The factors that reflect strong market position could be rooted customer relationships, superior quality products and services, good brand name and recognition, suitable cost structure, economies of scale etc.
Based on these factors the sponsor and the acquirer would decide if the target has a secure market position. Divestible assets include equipment, machinery, land etc. Similar to assets the seller could sell out the investments, non-core business divisions and subsidiaries to generate quick cash.
This cash could also be used to reinvest with newer strategic objectives. But of course it has to be taken into consideration that such investments and assets should not be a significant contributor to the income of the company. Companies that are a part of the established and definite markets are considered to be more favorable for an LBO transaction rather than those belonging to the novel markets.
Stability plays an important role as there are predictable demand and revenue which acts as a barrier to potential entry into the market signifying non-disruptive cash flows.
Businesses with a good management team are very attractive and valuable LBO candidates. When it comes to a highly leveraged capital structure with rigid performance targets require talented people with a successful track record. Management which has a prior experience of incorporating restructuring activities would be highly acknowledged by the sponsors and acquirers.
In cases where the existing management team lacks efficiency the acquirers would make certain important changes by adding, replacing or deleting certain members and make a new team altogether.
Whatever may be the situation having a strong management team is a pre-requisite for a good LBO transaction. The basic objective of an LBO is to get significant returns on the investment made, which comprises of selling the company few years down the LBO took place.
Hence it becomes important to determine if the business could be sold at a higher multiple than at the time of entering the deal. There are certain ratios that aid in the search of a good leverage buyout candidate. The higher the ratio the lower is the leverage the company carries on the balance sheet.
Kohlberg Kravis Roberts KKR in had announced that it had acquired majority stock holding in Amphenol which was into making coaxial cable and electronic connector. This consequently had increased the leverage in the capital structure of Amphenol. This is the tactic private equity firms used in the s and s that led to leveraged buyouts garnering a negative reputation.
To truly understand leveraged buyouts , you can take a look at examples of both beneficial and failed LBOs. They purchased Chewy. The buyout was funded mostly with debt and the agreement that Safeway would divest some assets and close underperforming stores. Hilton Hotels Leveraged buyouts can be successful in economic downturns. The economy plummeted and travel was especially hard-hit.
Blackstone initially lost money, but it survived thanks to its focus on management and debt restructuring. However, they did eventually bounce back, enjoying profitability for several decades before falling sales recently led to more troubles — this time not related to leveraged buyouts.
There are five typical phases in the life cycle of a business. Knowing which phase your company is in can help you decide whether a leveraged buyout is the right option or if you need to postpone selling. This is the stage where you hone your offerings and attempt to make your business talkably different. Some business owners are able to extend this stage of the cycle by using constant strategic innovation or entering new markets. LBOs provide a means of exit that is realistic for many companies.
Thinking about selling your company through a leveraged buyout? This means you have things like tangible assets, good working capital and positive cash flows. Having a positive balance sheet means lenders are more likely to lend to you. Firms looking to acquire companies through a leveraged buyout typically also look for proven management and a diverse, loyal customer base.
Companies that may be struggling due to a recession in their industry or poor management but still have positive cash flow are also good LBO candidates. Investors may see an opportunity to create efficiencies and improve the business and therefore be interested in acquiring it. Making the decision to consider a leveraged buyout of your company is not something to be taken lightly.
How will you feel once you sell? A business coach can look at the prospect objectively and without the emotion that you as the business owner will bring to the decision. With their help, you can make a solid decision that is best for your future. Despite some bad press in recent years, a leveraged buyout is a viable exit strategy in many situations.
As with any business decision, weigh the pros and cons before making your decision. What can we help you find? Generic filters Hidden label. Hidden label. Ultimate guide to leveraged buyouts Have you been thinking about your business exit strategy? Reveal the best next steps for your business Take a 5-minute assessment.
What is a leveraged buyout? Why do businesses use LBOs? Here are some additional reasons why a business owner would consider a leveraged buyout:. To make a public company private If you run a publicly traded company, you can use a leveraged buyout to consolidate the public shares and transfer them to a private investor who takes the shares off the market. To break up a large company.
To improve a company that is underperforming If an investor believes your company could eventually be worth much more than it is currently, a leveraged buyout could be a good option. To acquire a competitor Another common leveraged buyout occurs when a smaller company wants to be acquired by a larger competitor.
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