- June 19, 2018
- Posted by: Danny P. Burke
- Category: Buyouts
Introduction
Leveraging simply means to carry debt. If you’re planning a leveraged buyout of a small business, you will need to find funding both to buyout the departing owner and maintain the business while the new ownership team settles in.
Challenges for Sellers
Time Crunch
Why is the owner leaving? If the departing owner needs to move quickly, access to fast cash can be raised through private equity. Depending on the need for the quick exit, the departing owner may be willing to eat the fees to finance a full cash payout just to get out of the business and address whatever issues that need attended to. The faster the business acquisition financing has to be delivered up, the higher the fees.
Loan Structure
If the entire purchase is financed, the assets of the business serve as collateral. A detailed business valuation should be conducted to determine the value of those assets.
Challenges for Buyers
New owners will probably have great ideas for expanding and changing the goals and direction of the business. To this end, new owners would be well-served to finance as much of the buyout as possible; cash reserves would be put to best use in growing, rather than owning, the business.
LBOs For Smaller Companies
As employees move into ownership roles, they need to stop working in the business and dedicate their focus to working on the business. For example, mezzanine financing can be used to finance the entire purchase while the new owners find their strengths as owners and move together the build and expand the company.
Relationships Are Key
It’s possible to arrange a micro private equity buyout from retiring owner to protege. Particularly in the service industry, it’s not unusual to find skilled employees groomed for acquiring small businesses.
Construct A Small Scale Leveraged Buyout
When determining how a leveraged buyout can help in small business deals, it’s important to note that cash needs to be moving through multiple paths. Leveraged buyout loans must do more than just pay the departing owner for the value of the business.
However, potential buyers must take care to confirm that the business model will carry on. Is the business fading because the owner is unable to keep up with the work, or is the business model failing because times have changed? This is where a valuation can help.
New owners need to be:
• maintaining current production to keep up with customer needs
• sustaining payroll to keep current employees happy
• financing the new acquisition
• covering loan fees, valuation charges and related capital acquisition costs
When orchestrating a small business buyout, be aware that brand and name recognition may be largely tied to the departing owner. The value of the existing business under the existing owner must be determined for a successful sale, fair to all parties.
There’s no single right way to make a leveraged buyout work. Structuring a successful leveraged buyout takes a detailed valuation and thorough study of the monies available to make the changeover work as the business grows under new ownership.