{"id":12469,"date":"2019-07-18T13:16:47","date_gmt":"2019-07-18T12:16:47","guid":{"rendered":"https:\/\/entrepreneursgateway.com\/?p=12469"},"modified":"2019-11-05T09:01:36","modified_gmt":"2019-11-05T09:01:36","slug":"leveraged-buyout","status":"publish","type":"post","link":"https:\/\/entrepreneursgateway.com\/leveraged-buyout\/","title":{"rendered":"What is a Leveraged Buyout (LBO) How does it work?"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"12469\" class=\"elementor elementor-12469\">\n\t\t\t\t\t\t<div class=\"elementor-inner\">\n\t\t\t\t<div class=\"elementor-section-wrap\">\n\t\t\t\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-25ce747a elementor-section-stretched elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"25ce747a\" data-element_type=\"section\" data-settings=\"{&quot;stretch_section&quot;:&quot;section-stretched&quot;,&quot;background_background&quot;:&quot;gradient&quot;}\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-61e6ade9\" data-id=\"61e6ade9\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-2c59cbb elementor-widget elementor-widget-heading\" data-id=\"2c59cbb\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<h1 class=\"elementor-heading-title elementor-size-default\">What is a Leveraged Buyout ?(LBO)<br> How does it work?<\/h1>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-3c1bbcd1 elementor-align-center elementor-widget elementor-widget-post-info\" data-id=\"3c1bbcd1\" data-element_type=\"widget\" data-widget_type=\"post-info.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<ul class=\"elementor-inline-items elementor-icon-list-items elementor-post-info\">\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item elementor-repeater-item-cc4bd02 elementor-inline-item\" itemprop=\"author\">\n\t\t\t\t\t\t<a href=\"https:\/\/entrepreneursgateway.com\/author\/entrepreneursgateway-com-team\/\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<i class=\"fa fa-user-circle-o\" aria-hidden=\"true\"><\/i>\n\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text elementor-post-info__item elementor-post-info__item--type-author\">\n\t\t\t\t\t\t\t\t\t\tEntrepreneursGateway.com Team\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t<\/a>\n\t\t\t\t<\/li>\n\t\t\t\t<li class=\"elementor-icon-list-item elementor-repeater-item-3e861b9 elementor-inline-item\" itemprop=\"datePublished\">\n\t\t\t\t\t\t<a href=\"https:\/\/entrepreneursgateway.com\/2019\/07\/18\/\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<i class=\"fa fa-calendar\" aria-hidden=\"true\"><\/i>\n\t\t\t\t\t\t\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text elementor-post-info__item elementor-post-info__item--type-date\">\n\t\t\t\t\t\t\t\t\t\tJuly 18, 2019\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t<\/a>\n\t\t\t\t<\/li>\n\t\t\t\t<\/ul>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-728bfb5e elementor-widget elementor-widget-image\" data-id=\"728bfb5e\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-image\">\n\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"417\" height=\"299\" src=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-Post-Img-02.png\" class=\"attachment-medium_large size-medium_large wp-image-12472\" alt=\"\" loading=\"lazy\" srcset=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-Post-Img-02.png 417w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-Post-Img-02-300x215.png 300w\" sizes=\"(max-width: 417px) 100vw, 417px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-2917e4d elementor-section-stretched elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"2917e4d\" data-element_type=\"section\" data-settings=\"{&quot;stretch_section&quot;:&quot;section-stretched&quot;,&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-f24b65d\" data-id=\"f24b65d\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-080607d elementor-widget elementor-widget-heading\" data-id=\"080607d\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">How the LBO began...<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-c152748 elementor-widget elementor-widget-text-editor\" data-id=\"c152748\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>It was the 1960s, and at Bear Stearns, a fairly young Jerome Kohlberg was looking for a way to help older business owners leave their businesses (without liquidating their life\u2019s work) and recently bereaved families of business owners who were faced with a heavy estate tax burden. The result was the LBO in the form of a \u201cbootstrap\u201d deal developed by securing outside investors, restructuring the companies and floating a private company, often in conjunction with the existing management.<\/p><p>Jerome went on to form one of the most successful investment firms &#8211; Kohlberg Kravis Roberts &amp; Co. which in 1988 closed one of the biggest LBO deals in history when it bought RJR Nabisco for $25.1 billion.<\/p><p>The LBO has since then proliferated into a wide range of corporate finance models, including, mergers and acquisitions, takeovers (both hostile and consensual), private equity and start-ups.<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-92b90c4 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"92b90c4\" data-element_type=\"section\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-4028fec\" data-id=\"4028fec\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-dff4cd3 elementor-widget elementor-widget-heading\" data-id=\"dff4cd3\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">But what exactly is an LBO?...<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-a1f844c elementor-widget elementor-widget-text-editor\" data-id=\"a1f844c\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>Well, LBO is the short version for a leveraged buyout.\u00a0 This is a transaction that is used by companies in order to buy other businesses. The buyout combines the buyer\u2019s equity, together with the debt which is secured via the assets of the target company. \u00a0The structure of the deal is put together in such a way that the assets from the target company together with its cash flows are used to fund the majority of the financing costs.\u00a0<\/p><p>And, just for good measure here is the official definition:<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-8c74d5a\" data-id=\"8c74d5a\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-69d499b elementor-widget elementor-widget-image\" data-id=\"69d499b\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-image\">\n\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"400\" height=\"400\" src=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-Post-Img03.png\" class=\"attachment-large size-large wp-image-12475\" alt=\"\" loading=\"lazy\" srcset=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-Post-Img03.png 400w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-Post-Img03-150x150.png 150w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-Post-Img03-300x300.png 300w\" sizes=\"(max-width: 400px) 100vw, 400px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<div class=\"elementor-element elementor-element-7fc48c5 elementor-widget elementor-widget-text-editor\" data-id=\"7fc48c5\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p><span>Investopedia: \u201c<em>A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.<\/em>\u201d<\/span><\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-5cd431b elementor-widget elementor-widget-heading\" data-id=\"5cd431b\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">So\u2026 <\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-4c86fb3 elementor-widget elementor-widget-text-editor\" data-id=\"4c86fb3\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>There are three elements that must come together for an LBO to happen:<\/p><ol><li>A sponsor or buyer with an intent to purchase a company<\/li><li>A company that is the target of the purchaser<\/li><li>Assets within the company that can be used as leverage<\/li><\/ol>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-a52f255 elementor-widget elementor-widget-heading\" data-id=\"a52f255\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">To make things easier, let\u2019s look at the LBO example below:<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-d56c2a2 elementor-widget elementor-widget-text-editor\" data-id=\"d56c2a2\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>Mike wishes to purchase a car repair garage business from Sal. The price is $50K, but Mike only has $10K. So, Mike, in agreement with Sal, puts up the garage building as collateral for a loan of $40K from the bank. Sal is paid the $50K, and Mike is the new owner of the garage. The garage business now has a $40K debt.<\/p><p>That is an extremely simplified example, but it does highlight an important point &#8211; the newly acquired business now has newly acquired debt.<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-8545481 elementor-widget elementor-widget-text-editor\" data-id=\"8545481\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>Note:<\/p><p>Most LBOs in the corporate world are entered into with a view to selling the business within a certain number of years. This duration in years is used in LBO calculation models to arrive at various financial projections from the current price to profitability. We shall look at such a model later in this article.<span><\/span><\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-44c414a elementor-widget elementor-widget-heading\" data-id=\"44c414a\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Now for the best part....<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-31e97a6 elementor-widget elementor-widget-heading\" data-id=\"31e97a6\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<h3 class=\"elementor-heading-title elementor-size-default\">Leveraged Buyout Advantages <\/h3>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-859cd72 elementor-widget elementor-widget-text-editor\" data-id=\"859cd72\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>For the company buying the business, one of the main advantages of a leveraged acquisition is the equity return.\u00a0 Returns can be increased by leveraging the assets of the seller and by using a capital structure that includes a significant amount of debt.<\/p><p>Of course, there are also advantages for those selling, the main being that LBO is one of the many ways that businesses can be sold. Providing that they are able to exit the businesses at the desired price, then generally most sellers are happy to go along with the LBO process.\u00a0<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-6208640 elementor-blockquote--skin-border elementor-blockquote--button-view-icon-text elementor-blockquote--button-skin-classic elementor-blockquote--button-color-official elementor-widget elementor-widget-blockquote\" data-id=\"6208640\" data-element_type=\"widget\" data-widget_type=\"blockquote.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<blockquote class=\"elementor-blockquote\">\n\t\t\t<p class=\"elementor-blockquote__content\">\n\t\t\t\tFor companies that are going through a turnaround or are in distress, LBO could be a viable option.  They can enable the business to operate as normal, while the issues are being ameliorated as well as providing the seller with a viable exit.\t\t\t<\/p>\n\t\t\t\t\t\t\t<div class=\"e-q-footer\">\n\t\t\t\t\t\t\t\t\t\t\t<cite class=\"elementor-blockquote__author\">-<\/cite>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a href=\"https:\/\/twitter.com\/intent\/tweet?text=For+companies+that+are+going+through+a+turnaround+or+are+in+distress%2C+LBO+could+be+a+viable+option.++They+can+enable+the+business+to+operate+as+normal%2C+while+the+issues+are+being+ameliorated+as+well+as+providing+the+seller+with+a+viable+exit.+%E2%80%94+-&amp;url=https%3A%2F%2Fentrepreneursgateway.com%2Fwp-json%2Fwp%2Fv2%2Fposts%2F12469\" class=\"elementor-blockquote__tweet-button\" target=\"_blank\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fab fa-twitter\"><\/i>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-blockquote__tweet-label\">Tweet<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t<\/a>\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/blockquote>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-6ec7ef1 elementor-widget elementor-widget-heading\" data-id=\"6ec7ef1\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">And the not so best part...<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-312cdd5 elementor-widget elementor-widget-heading\" data-id=\"312cdd5\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<h3 class=\"elementor-heading-title elementor-size-default\">Leveraged Buyout Disadvantages<\/h3>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-cbd6f8d elementor-widget elementor-widget-text-editor\" data-id=\"cbd6f8d\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>For buyers, LBOs can carry some risks.\u00a0 One of the main disadvantages of an LBO is that once completed; a target business can be extremely leveraged &#8211; a scenario which allows for only a slight margin of error.\u00a0 Something such as the loss of several key customers could present problems with liquidity, which will then have a knock-on effect and could place the business in serious distress.<\/p><p>There are also some disadvantages for a seller who is executing an LBO.\u00a0 Generally, a buyer will carry out extensive due diligence which can consume both time and resources \u2013 both of which could be better spent managing the business.\u00a0<\/p><p>Additionally, lenders may also opt to carry out their own due diligence \u2013 creating even more disruption.\u00a0 Finally, if a key lender doesn\u2019t feel happy with their findings, then the transaction could still fall through \u2013 regardless of how much time and effort has been put in.\u00a0<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-a9eab76 elementor-widget elementor-widget-heading\" data-id=\"a9eab76\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Now, consider this...<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-61ace42 elementor-widget elementor-widget-text-editor\" data-id=\"61ace42\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>Many articles on leveraged buyouts pose the following question and for good reason. It is crucial to understand the role of debt within the context of a leveraged buyout.<\/p><p><strong><em>Is debt good for business or not?<\/em><\/strong><\/p><p>To answer this, we need to understand the effect of <em>leverage<\/em>.<\/p><p>In Physics, a lever is a mechanical construction that allows the displacement of a large load with smaller (but distributed) effort. In short, a lever amplifies the end result of the initial effort.<\/p><p>Leverage in finance is very much the same. A small amount of capital applied with leverage is used to achieve a return disproportionately larger than without leverage.<\/p><p>Consider the following acquisition that is made entirely with equity (in this case, cash).<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-c4f09d7 elementor-widget elementor-widget-image\" data-id=\"c4f09d7\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-image\">\n\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"701\" height=\"392\" src=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-03.jpg\" class=\"attachment-large size-large wp-image-12476\" alt=\"\" loading=\"lazy\" srcset=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-03.jpg 701w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-03-300x168.jpg 300w\" sizes=\"(max-width: 701px) 100vw, 701px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-9a2ead8 elementor-widget elementor-widget-text-editor\" data-id=\"9a2ead8\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>The sale of the company in the above example has generated a return of 15% which is respectable. Next, let\u2019s fund this acquisition with 50% cash and 50% with a loan at 5% interest. The situation now looks like this.<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-cb9db46 elementor-widget elementor-widget-image\" data-id=\"cb9db46\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-image\">\n\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"797\" height=\"462\" src=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-04.jpg\" class=\"attachment-large size-large wp-image-12477\" alt=\"\" loading=\"lazy\" srcset=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-04.jpg 797w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-04-300x174.jpg 300w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-04-768x445.jpg 768w\" sizes=\"(max-width: 797px) 100vw, 797px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-5ab8359 elementor-widget elementor-widget-heading\" data-id=\"5ab8359\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Now, here\u2019s an important thing to keep in mind...<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-8221d69 elementor-widget elementor-widget-heading\" data-id=\"8221d69\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">The company\u2019s operating cash-flow must be able to accommodate the interest payments (and capital repayments if so structured).<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-1da19d7 elementor-widget elementor-widget-text-editor\" data-id=\"1da19d7\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>This time around the returns are greater than if the acquisition was made wholly with equity. The figures would be more impressive with a 20\/80 equity-to-debt split which is more the industry norm.<\/p><p>This leverage works broadly due to the fortuitous coincidence of these facts:<\/p><ol><li>Well managed companies usually grow faster than the prevailing interest rates (Most LBO acquisitions undergo some form of restructuring for efficiency)<\/li><li>The increased investment of equity + debt allows for larger growth of revenue than an investment of just the equity<\/li><li>Money now (at acquisition) is worth more than money in the future (at sale of a business)<\/li><\/ol><p>We have now seen that the right level of debt is good for a business. In fact, a business with no debt is probably not generating maximum returns for its shareholders.<\/p><p><b>Next, let\u2019s have a look at the 6 steps that are involved with LBO analysis:<\/b><\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-37784ce elementor-section-stretched elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"37784ce\" data-element_type=\"section\" data-settings=\"{&quot;stretch_section&quot;:&quot;section-stretched&quot;,&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-df9499f\" data-id=\"df9499f\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-5297d99 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"5297d99\" data-element_type=\"section\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-inner-column elementor-element elementor-element-1eb5fac\" data-id=\"1eb5fac\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-3c50083 elementor-widget elementor-widget-heading\" data-id=\"3c50083\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<h2 class=\"elementor-heading-title elementor-size-default\"><span class=\"ez-toc-section\" id=\"THE_6_STEPS_OF_LBO_ANALYSIS\"><\/span>THE 6 STEPS OF LBO ANALYSIS<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-02d1c8d elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"02d1c8d\" data-element_type=\"section\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-958692c\" data-id=\"958692c\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-3e11c78 elementor-widget elementor-widget-heading\" data-id=\"3e11c78\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Step 1: <\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-ee711e8\" data-id=\"ee711e8\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-51f4dc6 elementor-widget elementor-widget-heading\" data-id=\"51f4dc6\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Purchase price expectation - The very first step is to assume the debt interest rate and purchase price etc.<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-2b8cc74 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"2b8cc74\" data-element_type=\"section\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-5581d4a\" data-id=\"5581d4a\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-cd6e179 elementor-widget elementor-widget-heading\" data-id=\"cd6e179\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Step 2: <\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-7e0a461\" data-id=\"7e0a461\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-db7d38f elementor-widget elementor-widget-heading\" data-id=\"db7d38f\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Source creation and use of funds \u2013 Once the purchase price and interest etc. information has been received, then a Sources and Uses table can be created.  \u2018Sources' highlight where the money is coming from whereas \u2018Uses' mirrors how much money is necessary to effectuate the transaction.<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-1945ef4 elementor-section-content-top elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"1945ef4\" data-element_type=\"section\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-1825849\" data-id=\"1825849\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-98e93aa elementor-widget elementor-widget-heading\" data-id=\"98e93aa\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Step 3: <\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-39c6076\" data-id=\"39c6076\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-4e3fa08 elementor-widget elementor-widget-heading\" data-id=\"4e3fa08\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Financial Projections \u2013 This step projects the financial statements and includes the balance sheet, cash flow statement and income statement usually for up to 5 years.<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-215fb08 elementor-section-content-top elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"215fb08\" data-element_type=\"section\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-ea371a3\" data-id=\"ea371a3\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-fd004d8 elementor-widget elementor-widget-heading\" data-id=\"fd004d8\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Step 4: <\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-ee78f94\" data-id=\"ee78f94\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-4661e15 elementor-widget elementor-widget-heading\" data-id=\"4661e15\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Balance Sheet Adjustments \u2013 This adjusts the balance sheet to reflect the new equity and debt.<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-a55bf0d elementor-section-content-top elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"a55bf0d\" data-element_type=\"section\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-3a2554f\" data-id=\"3a2554f\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-1c07904 elementor-widget elementor-widget-heading\" data-id=\"1c07904\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Step 5: <\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-580d69f\" data-id=\"580d69f\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-5a11ea0 elementor-widget elementor-widget-heading\" data-id=\"5a11ea0\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Exit \u2013 When the adjustments and financial projections have been finalised, expectations regarding the private equity firm\u2019s exit from the investment can begin. It is generally assumed that after the period of 5 years, the company will be sold, at the exact EBITDA multiple which the company was purchased at. <\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-aa9386c elementor-section-content-top elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"aa9386c\" data-element_type=\"section\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-9e83c90\" data-id=\"9e83c90\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-773e803 elementor-widget elementor-widget-heading\" data-id=\"773e803\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Step 6: <\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-5c19795\" data-id=\"5c19795\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-d23ee6f elementor-widget elementor-widget-heading\" data-id=\"d23ee6f\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">The final step is to calculate the Internal Rate of Return (IRR) on the initial investment.<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-39aacc4 elementor-section-stretched elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"39aacc4\" data-element_type=\"section\" data-settings=\"{&quot;stretch_section&quot;:&quot;section-stretched&quot;,&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-8715cbd\" data-id=\"8715cbd\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-5ec9080 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"5ec9080\" data-element_type=\"section\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-inner-column elementor-element elementor-element-93b9d86\" data-id=\"93b9d86\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-714ff2f elementor-widget elementor-widget-heading\" data-id=\"714ff2f\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<h2 class=\"elementor-heading-title elementor-size-default\"><span class=\"ez-toc-section\" id=\"The_5_Steps_of_an_LBO_Model\"><\/span>The 5 Steps of an LBO Model<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-0d64300 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"0d64300\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-b35ec05\" data-id=\"b35ec05\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-36661fc elementor-widget elementor-widget-text-editor\" data-id=\"36661fc\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>Buying and selling a business broadly consists of these steps. These are fairly self-explanatory, and there are no prizes for guessing where a leveraged buyout can be used. Now each step is a vast subject in itself, but we shall only look in more detail at the first step.<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-29874ef elementor-widget elementor-widget-heading\" data-id=\"29874ef\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Never forget though\u2026<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-2770a31 elementor-widget elementor-widget-text-editor\" data-id=\"2770a31\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>To always focus on the target\u2026<\/p><p>A sponsor is often on the lookout for a particular \u2018<em>type\u2019<\/em> of company that they wish to acquire. The particular set of attributes defining a desirable target will, in all probability, be unique to the sponsor and the sponsor\u2019s circumstances. But if the sponsor is considering acquiring a target using LBO, then the following attributes become very significant as these can directly affect the acquisition, but more importantly <em>the resale of the company<\/em>. For most acquisitions, a large chunk of the effort (sometimes the largest) goes into identifying a suitable target.<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-a9e09f9\" data-id=\"a9e09f9\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-044780d elementor-widget elementor-widget-image\" data-id=\"044780d\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-image\">\n\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"407\" height=\"749\" src=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-05.jpg\" class=\"attachment-large size-large wp-image-12478\" alt=\"\" loading=\"lazy\" srcset=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-05.jpg 407w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-05-163x300.jpg 163w\" sizes=\"(max-width: 407px) 100vw, 407px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<div class=\"elementor-element elementor-element-72e4ce0 elementor-widget elementor-widget-heading\" data-id=\"72e4ce0\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<h2 class=\"elementor-heading-title elementor-size-default\"><span class=\"ez-toc-section\" id=\"But_what_are_the_attributes_of_a_desirable_leveraged_buyout_target\"><\/span>But what are the attributes of a desirable leveraged buyout target?<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-137e829 elementor-widget elementor-widget-text-editor\" data-id=\"137e829\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>Well, a desirable LBO target should have the following:<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-9d9b2f9 elementor-icon-list--layout-traditional elementor-list-item-link-full_width elementor-widget elementor-widget-icon-list\" data-id=\"9d9b2f9\" data-element_type=\"widget\" data-widget_type=\"icon-list.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<ul class=\"elementor-icon-list-items\">\n\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Financeable Assets: This is the most important attribute of a target. No assets to collateralise means no leveraged finance and no LBO.<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Company maturity: A mature company is ideal. Sponsors are looking for companies with a proven track record. This translates into an ability to produce returns on the sponsor\u2019s investment (and ability to service debt). Mature companies also have industry standard reasons for wanting to exit. Standard reasons tend to have standard solutions. Start-ups, in contrast, have very little history to fulfill these criteria.<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Cost-Cutting Potential: An efficient company increases the rate of return at resale. One way to maximise returns is to cut non-essential costs.<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Steady Cash-Flows: Again, this is a useful trait if a company is going to pay back debt.<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Low Outstanding Debt: Fits neatly into the LBO model as the company will need to take on debt to finance the deal. On the other hand, if a company is already highly leveraged, but the debt is old, a refinancing may be in order resulting in cheaper and\/or lower debt. This is known as recapitalisation as it is a change in the capital structure of the company. A popular variation is a Dividend Recapitalisation, where some money from the financing is paid as a dividend to the shareholders!<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Low future capital expenditure: Maximises returns on investment.<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Feasible Exit: By the end of the holding term, the company must be in good shape to be resold.<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t<\/ul>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-c0ddfd9 elementor-widget elementor-widget-heading\" data-id=\"c0ddfd9\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<h2 class=\"elementor-heading-title elementor-size-default\"><span class=\"ez-toc-section\" id=\"And_the_skillset\"><\/span>And the skillset?<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-89a8323 elementor-widget elementor-widget-text-editor\" data-id=\"89a8323\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>Each of the 5 steps requires a unique set of skills. Larger companies almost always hire experts at each step or involve investment banks who tend to have all the skills in one place. Here is an overview of the skills required at each step.<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-25bf7b5 elementor-icon-list--layout-traditional elementor-list-item-link-full_width elementor-widget elementor-widget-icon-list\" data-id=\"25bf7b5\" data-element_type=\"widget\" data-widget_type=\"icon-list.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<ul class=\"elementor-icon-list-items\">\n\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Target Companies: Sector Knowledge\/Prospecting Experience\/Fundamental Analysis<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Funding: LBO Modelling\/Debt & Capital Finance Knowledge\/Cashflow Analysis\/ Balance Sheet Analysis\/Investment Banking<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Fix Cashflows+Pay Debt: Financial Engineering\/Professional Management (Accounts\/Operations etc.) <\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Resale: Sector Knowledge\/IRR Analysis\/Cash on Cash (multiple) Forecasts<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t<\/ul>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-679a372 elementor-widget elementor-widget-heading\" data-id=\"679a372\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<h2 class=\"elementor-heading-title elementor-size-default\"><span class=\"ez-toc-section\" id=\"What_about_assets_as_collateral\"><\/span>What about assets as collateral?<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-4784b3d elementor-widget elementor-widget-text-editor\" data-id=\"4784b3d\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>Here are some of the common company assets that can be put up as collateral for financing:<\/p><p>Stock, Buildings, Vehicles, Machinery\/Equipment, Accounts Receivable (Invoices\/Debt). In some cases, usually for smaller companies, financing can also be obtained against Purchase Orders, but these are not counted as assets.<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-fe6781d elementor-widget elementor-widget-heading\" data-id=\"fe6781d\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<h2 class=\"elementor-heading-title elementor-size-default\"><span class=\"ez-toc-section\" id=\"Finding_Assets\"><\/span>Finding Assets<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-7645b22 elementor-widget elementor-widget-text-editor\" data-id=\"7645b22\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>Companies are required to file accounts with the regulatory bodies annually or more often. These are the three statements that form the company\u2019s Financial Accounts.<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-cc181e2 elementor-widget elementor-widget-image\" data-id=\"cc181e2\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-image\">\n\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"889\" height=\"309\" src=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-06.jpg\" class=\"attachment-large size-large wp-image-12479\" alt=\"\" loading=\"lazy\" srcset=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-06.jpg 889w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-06-300x104.jpg 300w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-06-768x267.jpg 768w\" sizes=\"(max-width: 889px) 100vw, 889px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-cefa79a elementor-widget elementor-widget-text-editor\" data-id=\"cefa79a\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>All figures in all the statements have a story to tell. Some figures are more easily understood while others will need experts to unravel its meaning. A fourth statement usually released by companies is the Additional or Explanatory Notes with each statement. This is not a mandatory or structured document and allows the company to provide a narrative over the accounts. Anomalies, outliers, and deviations are found in these notes where companies try and explain <em>why<\/em> the numbers are the way they are.<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-fb0b358 elementor-widget elementor-widget-heading\" data-id=\"fb0b358\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<h2 class=\"elementor-heading-title elementor-size-default\"><span class=\"ez-toc-section\" id=\"The_Balance_Sheet\"><\/span>The Balance Sheet<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-2327041 elementor-widget elementor-widget-text-editor\" data-id=\"2327041\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>This represents the state of the company\u2019s overall performance based on the accounting equation:<\/p><p>Assets = Liabilities + Equity<\/p><p>This is where the company\u2019s assets will be listed with their current value, along with the liabilities and the shareholder equity. This is a \u201csnapshot\u201d view taken usually at the end of the company\u2019s financial accounting year. For a leveraged buyout, this would be the first place to look for signs of assets that can be used as debt collateral. Long-term debt on the balance sheet indicates the amount of leverage currently in action within the business.<\/p><p>The example illustrated below is Wal-Mart\u2019s balance sheet as at 31<sup>st<\/sup> Jan 2018:<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-852c819 elementor-widget elementor-widget-image\" data-id=\"852c819\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-image\">\n\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"1140\" height=\"2081\" src=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-07.jpg\" class=\"attachment-full size-full wp-image-12480\" alt=\"\" loading=\"lazy\" srcset=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-07.jpg 1140w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-07-164x300.jpg 164w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-07-768x1402.jpg 768w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-07-561x1024.jpg 561w\" sizes=\"(max-width: 1140px) 100vw, 1140px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-519eeb9 elementor-widget elementor-widget-heading\" data-id=\"519eeb9\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">And not forgetting the Income Statement\u2026<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-41fce77 elementor-widget elementor-widget-text-editor\" data-id=\"41fce77\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>Also known as the Profit and Loss Statement, it represents the company\u2019s performance over a specific accounting period (usually the previous quarter).<\/p><p>It states <em>where<\/em> the company\u2019s income and expenses have originated. Financial Engineering analysis for checking for inefficiencies in the business would start here.<\/p><p>An interesting section would be the Non-Operating Items. This lists Income and Expenses that are <em>not<\/em> part of the main business and could hold surprises for leveraged buyout sponsors, pleasant or otherwise.<\/p><p>Illustrated below is Wal-Mart\u2019s current income statement:<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-c53de6d elementor-widget elementor-widget-image\" data-id=\"c53de6d\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-image\">\n\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"921\" height=\"1329\" src=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-08.jpg\" class=\"attachment-full size-full wp-image-12481\" alt=\"\" loading=\"lazy\" srcset=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-08.jpg 921w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-08-208x300.jpg 208w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-08-768x1108.jpg 768w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-08-710x1024.jpg 710w\" sizes=\"(max-width: 921px) 100vw, 921px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-ddb7e38 elementor-widget elementor-widget-heading\" data-id=\"ddb7e38\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">And finally, the Cashflow Statement\u2026<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-11fba1b elementor-widget elementor-widget-text-editor\" data-id=\"11fba1b\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>To complete the picture, the statement of cash flow reports the impact of a firm&#8217;s operating, investing and financial activities on cash flows over an accounting period.<\/p><p>The cash flow statement shows the following:<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-a3a91c9 elementor-icon-list--layout-traditional elementor-list-item-link-full_width elementor-widget elementor-widget-icon-list\" data-id=\"a3a91c9\" data-element_type=\"widget\" data-widget_type=\"icon-list.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<ul class=\"elementor-icon-list-items\">\n\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">How the company obtains and spends cash<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Why there may be differences between net income and cash flows<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">If the company generates enough cash from operations to sustain the business<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">If the company generates enough cash to pay off existing debts as they mature<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">If the company has enough cash to take advantage of new investment opportunities<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t<\/ul>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-c167b82 elementor-widget elementor-widget-text-editor\" data-id=\"c167b82\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>This information is key to understanding whether the financials will support the leveraged buyout over the duration of the holding period.<\/p><p>Finally, illustrated below is Wal-Mart\u2019s Cash Flow statement:<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-9c38610 elementor-widget elementor-widget-image\" data-id=\"9c38610\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-image\">\n\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"1148\" height=\"1444\" src=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-09.jpg\" class=\"attachment-full size-full wp-image-12482\" alt=\"\" loading=\"lazy\" srcset=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-09.jpg 1148w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-09-239x300.jpg 239w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-09-768x966.jpg 768w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-09-814x1024.jpg 814w\" sizes=\"(max-width: 1148px) 100vw, 1148px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-02706fd elementor-blockquote--skin-border elementor-blockquote--button-view-icon-text elementor-blockquote--button-skin-classic elementor-blockquote--button-color-official elementor-widget elementor-widget-blockquote\" data-id=\"02706fd\" data-element_type=\"widget\" data-widget_type=\"blockquote.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<blockquote class=\"elementor-blockquote\">\n\t\t\t<p class=\"elementor-blockquote__content\">\n\t\t\t\tA solvency ratio is the key metric which is used to measure the ability of an enterprise in meeting its debts and other obligations.  The ratio will give an indication as to whether the cash flow of the company is sufficient enough to meet both long- and short-term liabilities.  \t\t\t<\/p>\n\t\t\t\t\t\t\t<div class=\"e-q-footer\">\n\t\t\t\t\t\t\t\t\t\t\t<cite class=\"elementor-blockquote__author\">-<\/cite>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a href=\"https:\/\/twitter.com\/intent\/tweet?text=A+solvency+ratio+is+the+key+metric+which+is+used+to+measure+the+ability+of+an+enterprise+in+meeting+its+debts+and+other+obligations.++The+ratio+will+give+an+indication+as+to+whether+the+cash+flow+of+the+company+is+sufficient+enough+to+meet+both+long-+and+short-term+liabilities.+++%E2%80%94+-&amp;url=https%3A%2F%2Fentrepreneursgateway.com%2Fwp-json%2Fwp%2Fv2%2Fposts%2F12469\" class=\"elementor-blockquote__tweet-button\" target=\"_blank\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fab fa-twitter\"><\/i>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-blockquote__tweet-label\">Tweet<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t<\/a>\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/blockquote>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-cba6b3a elementor-widget elementor-widget-text-editor\" data-id=\"cba6b3a\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>Basically, the lower that the solvency ratio is, the higher the possibility that it may default on debt obligations.<\/p><p>Now that we know where to find the figures, we can use them to work out the leverage currently in use. These are known as solvency ratios. They are:<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-9d925ba elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"9d925ba\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-833303e\" data-id=\"833303e\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-6991849 elementor-widget elementor-widget-heading\" data-id=\"6991849\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Debt Ratio = (Total Debt)\/(Total Assets)<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-1a7e870\" data-id=\"1a7e870\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-7a8c4b7 elementor-widget elementor-widget-heading\" data-id=\"7a8c4b7\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Debt Ratio=(Total Liabilities)\/(Total Assets)<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-da06c4c elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"da06c4c\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-3186c2a\" data-id=\"3186c2a\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-d5cfc8b elementor-widget elementor-widget-heading\" data-id=\"d5cfc8b\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">DebtToEquity Ratio=(Total Debt)\/(Total Equity)<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-f62acfa\" data-id=\"f62acfa\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-af0c687 elementor-widget elementor-widget-heading\" data-id=\"af0c687\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">DebtToEquity Ratio=(Total Liabilities)\/(Total Equity)<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<div class=\"elementor-element elementor-element-16c7e8e elementor-widget elementor-widget-text-editor\" data-id=\"16c7e8e\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>A lower debt ratio usually implies a more stable business with the potential of longevity because a company with a lower ratio also has lower overall debt. Each industry has its own benchmarks for debt, but .5 is a reasonable ratio. This means that the company has twice as many assets as liabilities. Or, this company\u2019s liabilities are only 50 percent of its total assets. Its creditors own half of the company\u2019s assets and the shareholders own the remainder of the assets.<\/p><p>A ratio of 1 means that total liabilities equals total assets. The company would have to sell off all its assets in order to pay off its liabilities. This is a highly leveraged firm, and once its assets are sold off, the business no longer can operate.<\/p><p>With smaller (private) leveraged buyouts, the leverage is up to the new owner and their risk or debt appetite. In some cases, it might be desirable to acquire the company with a high leverage rather than lose it to competitors. This way the new owner can run the company with almost complete autonomy even though the banks might be the major shareholders since banks are usually not interested in running companies.<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-a119bc4 elementor-widget elementor-widget-heading\" data-id=\"a119bc4\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Stay with me...<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-260e112 elementor-widget elementor-widget-text-editor\" data-id=\"260e112\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p><b>Understanding Deferred Consideration\u2026<\/b><\/p><p>For some businesses, it is not always possible or desirable to obtain a bank loan. This is when deferred consideration may be used. Deferred consideration is when the cost of acquisition is deferred to a future date, i.e., the seller agrees to get paid at a later date. This process evolves into a risk-mitigating act between buyer and seller. The buyer, having paid the seller, faces the risk of dealing with hidden problems within the company. The seller faces the risk of not being paid the agreed deferred amount.<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-650d5d2 elementor-blockquote--skin-border elementor-blockquote--button-view-icon-text elementor-blockquote--button-skin-classic elementor-blockquote--button-color-official elementor-widget elementor-widget-blockquote\" data-id=\"650d5d2\" data-element_type=\"widget\" data-widget_type=\"blockquote.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<blockquote class=\"elementor-blockquote\">\n\t\t\t<p class=\"elementor-blockquote__content\">\n\t\t\t\tA deferred payment is usually the least risky option for the new owners as there is no third party involved and the previous owner is vested in the performance of the company.   \t\t\t<\/p>\n\t\t\t\t\t\t\t<div class=\"e-q-footer\">\n\t\t\t\t\t\t\t\t\t\t\t<cite class=\"elementor-blockquote__author\">-<\/cite>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a href=\"https:\/\/twitter.com\/intent\/tweet?text=A+deferred+payment+is+usually+the+least+risky+option+for+the+new+owners+as+there+is+no+third+party+involved+and+the+previous+owner+is+vested+in+the+performance+of+the+company.++++%E2%80%94+-&amp;url=https%3A%2F%2Fentrepreneursgateway.com%2Fwp-json%2Fwp%2Fv2%2Fposts%2F12469\" class=\"elementor-blockquote__tweet-button\" target=\"_blank\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fab fa-twitter\"><\/i>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-blockquote__tweet-label\">Tweet<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t<\/a>\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/blockquote>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-ea10a33 elementor-widget elementor-widget-text-editor\" data-id=\"ea10a33\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>There are many variations of this theme involving:<\/p><ol><li>Option to split payments &#8211; upfront and deferred<\/li><li>Reducing the initial price in favour of using other options in this list<\/li><li>Paying interest to the previous owner, effectively taking a loan from them<\/li><li>Reducing the tax burden for the previous owner<\/li><li>Performance related incentives (earn-outs) to help sweeten a deferred payment deal<\/li><li>Retaining previous owners as paid consultants with performance related bonuses<\/li><\/ol>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-0997dfc elementor-widget elementor-widget-heading\" data-id=\"0997dfc\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<h3 class=\"elementor-heading-title elementor-size-default\">And Personal Guarantees (PGs)<\/h3>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-a645ebd elementor-widget elementor-widget-text-editor\" data-id=\"a645ebd\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>A company being a separate legal entity, defaults on loans by businesses often leave banks with no recourse but to write off the loan as bad debt. Personal guarantees are a bank&#8217;s way of holding individuals accountable for defaults. When the assets of a company are not sufficient collateral to finance a loan, the bank asks for personal guarantees from the company executives. The guarantee might also be secured on the personal assets of the executives, e.g., the director&#8217;s home.<\/p><p>Leveraged buyouts involving companies with PGs are usually tasked with getting rid of the PG. If the value proposition with the PG is still an attractive one, the PG can be built into the financing of the company. On the other hand, it can be used to discount the price.<\/p><p>Some Personal Guarantee protection is available in the form of insurance.<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-64d584f elementor-widget elementor-widget-heading\" data-id=\"64d584f\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<h3 class=\"elementor-heading-title elementor-size-default\">Listed below is the preferred Strategy for an LBO Deal<\/h3>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-c2b1fb5 elementor-icon-list--layout-traditional elementor-list-item-link-full_width elementor-widget elementor-widget-icon-list\" data-id=\"c2b1fb5\" data-element_type=\"widget\" data-widget_type=\"icon-list.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<ul class=\"elementor-icon-list-items\">\n\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Get the owner to agree HOTs on exclusivity, a notional sale price and timescales for the sale, pending due diligence.<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Assuming due diligence checks out with minor caveats, I would look (very hard) to offer deferred payments out of the cash flow from the business.<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Any initial payments would come from company cash or non-essential liquidable assets.<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Or instead of a down payment, I would offer the owner the option to retain certain assets (e.g., buildings) which the company would lease from the owner, thus, building in an income stream for the owner.<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">The next tier would be to seek finance from banks to complete the initial payment, providing cash flow supports the debt + any deferred payments.<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Finally, Joint Venture with partners to provide upfront liquidity.<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Update HOTs with agreed finance structure<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Proceed with the Sale and Purchase Agreement (SPA)<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Completion<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Operate for X years according to LBO model (see section below)<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t<li class=\"elementor-icon-list-item\">\n\t\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-icon\">\n\t\t\t\t\t\t\t<i aria-hidden=\"true\" class=\"fas fa-chevron-circle-right\"><\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t<span class=\"elementor-icon-list-text\">Exit according to LBO model (see section below)<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t<\/ul>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-92035a4 elementor-widget elementor-widget-heading\" data-id=\"92035a4\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<h3 class=\"elementor-heading-title elementor-size-default\">HOT Structure<\/h3>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-adf5c82 elementor-widget elementor-widget-text-editor\" data-id=\"adf5c82\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>Initial HOT Structure:<\/p><ol><li>Company name\/address and other identification<\/li><li>Seller name\/address and other identification<\/li><li>Buyer name\/address and other identification<\/li><li>Date and place of HOT<\/li><li>Agreed notional price<\/li><li>Exclusivity clause<\/li><li>NDA clause<\/li><li>Subject to due diligence clause<\/li><li>Timescales for due diligence with extensions for complications\/delays<\/li><li>Timescales for the offer with extensions for subsequent offers<\/li><\/ol><p>Additional HOTs after offer agreed with the seller:<\/p><ol start=\"11\"><li>Finance overview with timescales<\/li><\/ol><p>This would be followed by the legal SPA and SHA (shareholders\u2019 agreement) being signed. It would be ideal to have the Sales and Purchase Agreement drawn up by a single law firm!<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-50020d9 elementor-section-stretched elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"50020d9\" data-element_type=\"section\" data-settings=\"{&quot;stretch_section&quot;:&quot;section-stretched&quot;,&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-95f8d44\" data-id=\"95f8d44\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-18d15b0 elementor-widget elementor-widget-heading\" data-id=\"18d15b0\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<h3 class=\"elementor-heading-title elementor-size-default\">To make things easier, lets\u2019 have a look at the leveraged buyout Modelling example below:<\/h3>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-028b095 elementor-widget elementor-widget-text-editor\" data-id=\"028b095\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>This is an example of a simple LBO model which is used to project the financials over a 7-year term. The objective is to calculate the optimum rate of return and period for which the investment should be held. We make the initial assumptions using available figures for a target company wherever possible. In this example, we have a $100m company valued at 9x EBITDA. The buyer pays $300m, and the rest is raised via a term loan of $300m at 4% interest and another $300m from senior notes at 8% interest.<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-0d0d065 elementor-widget elementor-widget-image\" data-id=\"0d0d065\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-image\">\n\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"563\" height=\"725\" src=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-10.jpg\" class=\"attachment-full size-full wp-image-12483\" alt=\"\" loading=\"lazy\" srcset=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-10.jpg 563w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-10-233x300.jpg 233w\" sizes=\"(max-width: 563px) 100vw, 563px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-60cbf50 elementor-section-stretched elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"60cbf50\" data-element_type=\"section\" data-settings=\"{&quot;stretch_section&quot;:&quot;section-stretched&quot;,&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-4e99ff0\" data-id=\"4e99ff0\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-615dd8a elementor-widget elementor-widget-heading\" data-id=\"615dd8a\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Let\u2019s start with the Cashflow\u2026<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-80b730a elementor-widget elementor-widget-text-editor\" data-id=\"80b730a\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>The first step is to project the cash flow starting from the projected growth and adjusting for interest (calculated in the next section), taxes, depreciation, amortisation, increase in net working capital and capital expenditure. This leaves us with projected free cash flow and shows that the debt can be serviced.<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-4341579 elementor-widget elementor-widget-image\" data-id=\"4341579\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-image\">\n\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"1141\" height=\"403\" src=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-11-2.jpg\" class=\"attachment-full size-full wp-image-12484\" alt=\"\" loading=\"lazy\" srcset=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-11-2.jpg 1141w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-11-2-300x106.jpg 300w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-11-2-768x271.jpg 768w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-11-2-1024x362.jpg 1024w\" sizes=\"(max-width: 1141px) 100vw, 1141px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-12af36e elementor-widget elementor-widget-heading\" data-id=\"12af36e\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Then the Debt Schedule\u2026<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-341df06 elementor-widget elementor-widget-text-editor\" data-id=\"341df06\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>This is a straightforward application of repayment and interest over the 7-year period for the term loan and interest only payments for the senior notes. It also projects the total debt to be repaid in any year if the business were to be sold in that year.<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-d67bbbc elementor-widget elementor-widget-image\" data-id=\"d67bbbc\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-image\">\n\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"1142\" height=\"393\" src=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-12.jpg\" class=\"attachment-full size-full wp-image-12485\" alt=\"\" loading=\"lazy\" srcset=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-12.jpg 1142w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-12-300x103.jpg 300w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-12-768x264.jpg 768w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-12-1024x352.jpg 1024w\" sizes=\"(max-width: 1142px) 100vw, 1142px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-6180d30 elementor-widget elementor-widget-heading\" data-id=\"6180d30\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<span class=\"elementor-heading-title elementor-size-default\">Next, the Returns\u2026<\/span>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-ad94c64 elementor-widget elementor-widget-text-editor\" data-id=\"ad94c64\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>This model illustrates the:<\/p><p>Exit Transaction Value \u2013 the exit sale price at different price points (7.5x-10.5x EBITDA) for different years<\/p><p>Sponsor Equity Value \u2013 the actual price paid by the new buyer for the business at the various price points<\/p><p>MoIC &#8211; the rate of return as a multiple of invested capital<\/p><p>IRR \u2013 the internal rate of return as a percentage of capital invested<\/p><p>This model shows that the best outcome for the buyers would be to sell in years 3 or 4 for 9x EBITDA<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-00f3d22 elementor-widget elementor-widget-image\" data-id=\"00f3d22\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-image\">\n\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"1135\" height=\"850\" src=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-13.jpg\" class=\"attachment-full size-full wp-image-12486\" alt=\"\" loading=\"lazy\" srcset=\"https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-13.jpg 1135w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-13-300x225.jpg 300w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-13-768x575.jpg 768w, https:\/\/entrepreneursgateway.com\/wp-content\/uploads\/2019\/07\/LBO-img-13-1024x767.jpg 1024w\" sizes=\"(max-width: 1135px) 100vw, 1135px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-17595eb elementor-section-stretched elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"17595eb\" data-element_type=\"section\" data-settings=\"{&quot;stretch_section&quot;:&quot;section-stretched&quot;,&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-eed24aa\" data-id=\"eed24aa\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-1efecb9 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"1efecb9\" data-element_type=\"section\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-inner-column elementor-element elementor-element-9faebc5\" data-id=\"9faebc5\" data-element_type=\"column\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-74effa5 elementor-widget elementor-widget-heading\" data-id=\"74effa5\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<h2 class=\"elementor-heading-title elementor-size-default\"><span class=\"ez-toc-section\" id=\"The_bottom_line%E2%80%A6\"><\/span>The bottom line\u2026<span class=\"ez-toc-section-end\"><\/span><\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<div class=\"elementor-element elementor-element-7b7fb1d elementor-widget elementor-widget-text-editor\" data-id=\"7b7fb1d\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>For those investors who are lacking equity capital, then leveraged buyout (LBO) can be an extremely fascinating option.\u00a0 They simply borrow money, then invest.\u00a0 I guess the likelihood of a win-win situation will be dependent on the selection process that was used to determine the leveraged buyout candidate, to begin with.\u00a0 For those that have chosen correctly, then there is a high probability of earning huge returns, and for those that don&#8217;t \u2013 well I think you can guess the rest\u2026<\/p><p>Always keep in mind that the process of applying for an SBA loan can be fairly time consuming and could take the focus away from running the company.\u00a0\u00a0\u00a0 Therefore, for some small business owners \u2013 more so those that are just beginning &#8211; it just might not be worth the time cost.<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-7d4b7cae elementor-section-stretched elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"7d4b7cae\" data-element_type=\"section\" data-settings=\"{&quot;stretch_section&quot;:&quot;section-stretched&quot;,&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-58c8ed2a\" data-id=\"58c8ed2a\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-column-wrap elementor-element-populated\">\n\t\t\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-11ade50d elementor-view-framed elementor-shape-circle elementor-widget elementor-widget-icon\" data-id=\"11ade50d\" data-element_type=\"widget\" data-widget_type=\"icon.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<div class=\"elementor-icon-wrapper\">\n\t\t\t<div class=\"elementor-icon\">\n\t\t\t<i aria-hidden=\"true\" class=\"far fa-hand-point-down\"><\/i>\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-3ef98a45 elementor-widget elementor-widget-heading\" data-id=\"3ef98a45\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<h3 class=\"elementor-heading-title elementor-size-default\">NOW OVER TO YOU...<\/h3>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-27178a8e elementor-widget elementor-widget-text-editor\" data-id=\"27178a8e\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\">\n\t\t\t\t<p>Let me know what you think&#8230; What is your experience with leveraged buyout (LBO&#8217;s)?\u00a0 \u00a0<\/p><p>Is there anything you would like to share, or you&#8217;d like us to cover? \u00a0<\/p><p>Leave a comment below, and I will be sure to answer as soon as it comes in!!<\/p>\t\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>LBO is the short version for a leveraged buyout.  This is a transaction that is used by companies in order to buy other businesses. The buyout combines the buyer\u2019s equity, together with the debt which is secured via the assets of the target company.<\/p>\n","protected":false},"author":9,"featured_media":12471,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"generate_page_header":""},"categories":[31],"tags":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.2.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>What is a Leveraged Buyout (LBO) How does it work? - Entrepreneurs Gateway<\/title>\n<meta name=\"description\" content=\"What is a leverage buyout? The leverage buyout advantages and disadvantages. 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