Buyout Financing – Everything You Need to Know

Posted by Credit Financing Guru

When companies driven by strategic factors set out to acquire certain businesses/firms, they usually rely on the expert advice of a throng of financial and legal advisers. Financial partners also come in the form of business brokers which handle small- to mid-range transactions. Regional banks are the front runners in identifying possible businesses for acquisition.

Most firms/individuals deal with investment banks to facilitate the buyout financing and handle the nitty-gritty of obtaining controlling shares from the targeted firm. They generally help investors know what to anticipate and craft a profit strategy at the best workable terms.

When the stakes are high, some large companies or individuals hire an investment bank — usually with a breadth of global expertise — to provide a package of services — from conducting valuation (after making due diligence) from a buyout perspective, to compiling information detailing the target company’s worth (including assets and future worth), to providing legal advice on requirements depending on the corporation code (which every country has), to reviewing corporate By-Laws and Articles of Incorporation of the company to be acquired; to acting as broker to raise capital to buy the company (with a bigger acquisition target, the more fund managers there may be to provide capital).

The investment manager may also handle the public relations and investor relations requirements that are usually part and parcel of the buyout financing transaction. In return for its services, the investment bank gets a percentage of the total buyout financing cost apart from regular professional fees plus commissions.

In certain cases, a comprehensive management buyout feasibility study is also presented. This includes market analysis (along with competitive pricing information); current and future competition, facilities & equipment; and historical financial performance report (with future projections and valuation).

To raise management buyout financing on the best possible terms, check out online sites for a reputable firms specializing in structuring buyouts of firms, subsidiaries, divisions and product brands. It can be a long and tedious process, but hiring a competent firm can take care of just about everything, from orchestrating the efforts of, and dealing with, the financial institutions, partners or investors, as well valuation firms, accountants, and legal counsels, to the other professional management buyout advisers who may be part of the transaction.

Buyout financing may utilize the assets of the buyer. Through an investment banking firm, the buyer may trade in his shares of stock to buy out shares from a firm. Or the money may be borrowed based on the business value and assets of the company being acquired. Sometimes, a venture capitalist (a speculator who handles innovative projects, with an eye towards higher rate of return than that given by more traditional investments) is hired to build distribution channels, set up branches and factories, and handle the operating capital.

There is also what is known as leveraged buyout financing (LBO), whereby the interested buyer/investor goes to the open market to accumulate shares to obtain a seat in the targeted firm’s Board. LBO entails finding the right strategic partners to effect the desired transaction.

Buyout financing can be a highly suitable option that can work for you, especially with a good financial partner/advisor which can devise a program that makes the most sense for you and assist you every step of the way.

Buyout Financing FAQ:

Question: Can bank financing be secured to buyout a partner in investment real estate property?
My mother and uncle (her brother) inherited an investment property. This is not a rental property, but the property will have considerable worth upon its sale. If my mother wanted to buyout my uncle’s share today with the intent to sell within 3-6 months, could she secure financing from a bank for this purpose? I assume we’d have to prove to the bank that the property would be profitable (in this case, upon its sale).

Answer: If you are talking about land she will have a tough time. If she can not repay the loan without selling the land she will not get a loan.

Question: Would you be happy or unhappy if a company whose stock you owned was bought by a leveraged buyout specialist?
Here’s the catch, would you be happy if they financed the purchase with junk bonds? I was guessing no, because of course junk bonds carry a high risk of default which could throw the company into lots of debt, right? And if that happened your stock price that you owned would go down if not disappear because of bankruptcy right?

Answer: Usually the bonds are sold to other investors, and the shareholders are bought out with the proceeds. And what happens to the stock is the buyers problem.

Question: What is reverse buyout?

Answer: A reverse buyout is a technique used by a private company to go public without the regulatory requirements of an initial public offering (IPO).

Question: What is the difference between buying and leasing with equipment?
I am buying a dump truck and the finance company wants to lease it to me with a $1 buyout at the end. Why is it a lease instead of a purchase? How will it affect my taxes for my business at the end of the year?

Answer: With leasing you can expense the entire monthly payment. If you buy it, you have to capitalize it and depreciate it. The monthly depreciation may be less than the monthly expense deduction but you may be able to take sec 179 depreciation on it which means you could deduct the entire purchase in the year of purchase, BUT only to the amount of profit. Say your business made $15000 profit after all expenses except the truck. Truck costs 20000. You could take section 179 deprec for $15,000 and depreciate the 5000 balance over the remaining life (3-5 yrs). Talk to a CPA to get exact details.

Question: What is a leveraged buyout?

Answer: A LBO, or leveraged buyout, is a way to take a company private.

Say you have a publicly-traded company. But management believes that the market is seriously under-valuing the company and that the company could be worth more if it were private.

Management, or a consortium of other individuals, then borrow large sums of money from investment banks (this is the “leveraged” part – anything with leveraging involves debt/borrowing) and use it to buy out all current shareholders and retire the shares, thus becoming the sole owners of the company.

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Categories: Business Financing
2Feb

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