You must have knowledge of various investment issues and financial options as a business owner. Several times in the secondary and primary markets, you must have come across the word Leveraged Buyout or LBO. You may possibly be acquainted with what leveraged buyout is, but you may not have enough information about its functioning. So, as a businessman as well as an investor, have a look at Leveraged Buyout and its several aspects.
A classic dictionary definition of this word is ‘a debt-financed transaction, usually via bonds and bank loans, which aims at taking a public corporation private’. In simpler terms, a LBO takes place through the use of debt or borrowed money, when a financial supporter gets control over a majority of a company’s equity. Leveraged buyout is also known as bootstrap transaction or high-leveraged transaction. Marc Leder, CEO of Sun Capital Partners, Inc. has been involved in leveraged buyouts for more than 25years.
It generally follows a ratio of 30% equity to 70% debt. In order to meet the costs of acquisition, LBO is essentially a strategy in which a company obtains another company and uses borrowed money like loans and bonds. For getting such loans, acquired companies as well as major companies assets are used as security. As an investor, you can be a part of Leveraged buyout either by purchasing equity or by purchasing the debt. In the LBO arcade, there are primarily three types of transactions:
- The dealings in which a public company is taken private,
- The divestures that effect from selling off divisions of a public corporation,
- Private market dealings that include companies whose stocks are not publicly operated.
In the circumstance of LBO, a leveraged balance sheet comprises of a major portion of loan capital and a little portion of equity capital. The loan capital is usually borrowed through public or privately placed bonds and banks. In this situation, the debt appears on the balance sheet of the acquired company and its flow of cash is used to pay back the dues. The leveraged buyout option gives nearly 20%profitable returns on investment. It happens when the financial guarantor sells shares in a public offering or sells the main company to another company and a major corporate restructuring takes place.
According to Marc Leder, on one hand, leveraged buyout can make more efficacious use of company’s resources, but on the other hand, it can also cause great financial misery. In spite of this, a recent market research says that the market is quite sociable to leveraged buyout activities.
Since an individual or even modestly capitalized small business can complete an LBO under the right circumstances, this continual presence of the leveraged buyout culture is great for the small business buyer. Over the last 20-30 years, banks have been familiarized to participating in both large and small LBO’s. The extensive acceptance of the leveraged buyout enables the average businessman to approach banks successfully and take advantage of the technique for buyout financing. The point is leveraged buyout’s are carried on a small scale all the time and are one of the most operational ways for individuals to build wealth rapidly.