Whether you’re looking to buy or sell a business, there are plenty of different deal structures you can use. Two of the most common are leveraged buyouts and management buyouts. This article will look at these two popular structures and the differences between them.
When it comes to selling a business, a management buyout is one of the most popular options. This is a deal where the current management of the company takes control of the business by purchasing a management control. Here, the employees of the business will become the owners. Thus, utilizing their resources, familiarity, and ambition to try and actualize the potential of the company.
A leveraged buyout is a different form of deal that helps the buyers to raise the capital needed to acquire the business. It occurs when a large proportion of the buyout is backed by a loan. From there, the buyers will maintain their financial security by using the assets of the newly-acquired business. This can help to protect themselves against the debt on the loan. The leveraged buyout is the ideal way for a group to purchase a company that’s worth more than their spending power.
The main difference between the two deals is that there’s more continuity with an MBO. The management team will remain largely the same. Thus, they’ll have the experience and familiarity with the company. This can ensure that there’s a smooth transition with little upheaval. On the other hand, an LBO can lead to a more tumultuous period as the buyers install their own management team.
On top of this, both deals have a different financial source behind their deal. Usually, the management team will fund the MBO entirely, promoting extra security. However, external financing is how an LBO gets funding. Usually, this external funding will come with plenty of debt. This could lead to an uncertain financial future for the company. Nevertheless, buyouts can help businesses become more efficient and streamline them. If you can arrange an LBO carefully, a business can still thrive and grow in the future.
Leveraged buyouts and management buyouts can both help push a company forward. By reading the guide above, you should be able to structure your own acquisition or sale for the good of the company.
