How to Perform a Leveraged Buyout

These are the basics of an aggressive business practice made legendary in the 1980s. A leveraged buyout is a way of taking control of a company with little or no cash outlay, using the company's own assets as collateral to fund the buyout.

Difficulty: Challenging

Instructions

Things You'll Need:

• Investment Advice
• Accountants
• Attorney
• Business Loans
• Financial Advisers
• Business loans

1. Research the company to be purchased. Make sure that the company's assets are adequate to secure the necessary loans and that the company generates enough cash flow to repay the debts.

2. Make sure the management team is strong and will continue with the company after the buyout takes place. This is particularly critical because the company will have to operate at its optimum to repay the debt amassed during the buyout and still make a profit.

3. Hire a professional to act as a go-between in negotiations with management, shareholders, potential investors and board members. The issue of a takeover is a sensitive one, and tempers may flare as issues of job security arise.

4. Assemble your team of leveraged buyout specialists, investment bankers, accountants and attorneys. The extensive and specialized financial analysis and legal structuring mandate that experienced professionals take the lead in putting the deal together.

5. Purchase a controlling interest in the company. Obtain the majority of funds using the company's assets as collateral and, if you don't have the cash yourself, solicit the company's management team and outside investors for the remainder of the cash necessary to complete the purchase.

Tips & Warnings

• Start with a solid company that has the ability to generate enough cash to pay off the debt created by a leveraged buyout.
• If members of the existing management team are a bit skittish about the proposed takeover, entice them to stay on with the company by offering them an opportunity to buy shares themselves. Also offer stock options.
• The loose lending policies of the 1980s are a thing of the past, so it would be unusual for a lending institution to make a loan for a leveraged buyout with no equity (cash) contributions up front.
• The very nature of the buyout is an opportunity for investors to score huge profits. When the company takes on the huge initial debt necessary to fund the buyout, the value of the stock decreases greatly, enabling management and others to purchase stock at rock-bottom prices. As the company debt is paid off, the stock value increases, creating wealth for the shareholders.

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