Whether you are considering follow-on acquisitions, fund formation or a buyout, our Private Equity attorneys can help guide you through the process.
Management and leveraged buyouts (MBOs/LBOs) are a common practice in the private equity world, but it is essential that you receive knowledgeable financial, tax and legal advice before starting. With experience serving various private equity funds, independent sponsors, management teams and investors and venture capitalists, KJK can help ensure the buyout you’re considering complies with all laws and regulations and benefits you or your fund in the long run.
Why Consider a Buyout?
Buyouts occur when one company, often a private equity fund, purchases more than 50% of a business to achieve a controlling interest in the company. Buyouts can provide the purchasing fund with significant benefits if done correctly and smartly. However, since a buyout often includes the purchase of the company’s debt as well as assets, it also comes with risk.
If you see an underperforming or undervalued business or section of a large company, you may want to consider a buyout. Buyouts offer a variety of benefits for both the buyer and the seller. Whether you’re considering selling part of your company or are looking to invest in a business, KJK can provide guidance to help you achieve as many of these benefits as possible.
Risks of a Buyout
While there are many potential benefits to buyouts, there are also some significant risks. Since you must either front your own money or apply for a loan, you always risk defaulting or losing your entire investment if the company fails in the future.
Because buyouts often include buying the company’s debt, you must also prepare to pay the debt’s interest, which could be substantial. If you don’t have the funds to do so and the company profits don’t cover it, you could face bankruptcy. Work with KJK to create a financial plan before committing to the buyout to ensure you have enough funds to pay debts and interest while supporting the company.
Additionally, after a buyout, you may lose key personnel who are the backbone of the business. This loss could affect your business, slowing down production or creating more administrative work. KJK can help advise you how to retain key employees after a buyout.
If you want to combine the company you buy out with your company, the integration can take time, using up resources and finances. Plan the integration thoroughly with the KJK team’s help to ensure the process goes as smoothly as possible.
LBO v. MBO:
There are two major types of buyouts: Leveraged Buyout (LBO) and Management Buyouts (MBO). The team at KJK can help you determine which type of buyout is best for your situation, negotiate for you and review all contracts to ensure you comply with state and federal regulations and avoid anti-trust and anti-fraud claims.
How KJK Can Help
Buyouts can be complicated and you must abide by all laws and regulations when acquiring a company, creating contracts and applying for loans. We can also help you understand whether a buyout is right for you at this time or whether you should wait for a better opportunity.
Leveraged Buyout (LBO)
If you don’t want to invest your own capital in the buyout, you can choose an LBO, which involves using a loan to acquire a company. This allows companies to purchase other businesses without having to commit significant amounts of their own capital. Most of these loans are large and require collateral. Often, private equity funds use the company they plan to purchase as collateral, which lessens the risk to themselves.
KJK can help you structure your LBO, from targeting a company to structuring the loan and negotiating the buyout itself.
Management Buyout (MBO)
The other option is an MBO, which happens when a company’s internal management buys out most or all of their company, or a division of the parent company. MBOs are a fantastic way for managers to become owners. Since they already have experience managing the company, there is less risk that their new acquisition will fail.
However, MBOs also involve significant sums, so the managers may need to apply for a loan or work with private funds. KJK can connect managers interested in an MBO with private funds or recommend other ways to raise money and can negotiate and review your contracts.
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Let KJK Help minimize your risk
The Private Equity practice group at KJK is ready to assist your fund with your next buyout and any other issues you may face. Call us today to schedule a consultation and learn how we can help you maximize your opportunities and minimize your risk.