{"id":4661,"date":"2017-04-25T13:11:33","date_gmt":"2017-04-25T18:11:33","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/closing-a-business\/what-is-a-leveraged-buyout.html"},"modified":"2024-05-23T00:59:00","modified_gmt":"2024-05-23T05:59:00","slug":"what-is-a-leveraged-buyout","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/closing-a-business\/what-is-a-leveraged-buyout.html","title":{"rendered":"What Is a Leveraged Buyout?"},"content":{"rendered":"\n
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What Is a Leveraged Buyout?<\/h1>\n
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\n By Amber Sheppard, Esq.<\/a> | Legally reviewed by Laura Temme, Esq.<\/a>\n | Last updated\n
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Editorial Note: We earn a commission from affiliate partner links on FindLaw. Commissions do not affect the editorial integrity of our legal content.<\/p>\n\n <\/div>\n \n

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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n

Personal and professional factors go into the decision to sell a small business<\/a>. It’s not uncommon for small-business owners to expect the next generation of management to step up to carry on their company’s legacy.<\/p>\r\n

However, that takeover is not easy when that younger small-business manager needs a significant source of equity to purchase the target company. Sometimes, a buyer wants to go through with the business acquisition, but interest rates from typical lenders are too high. Then, you have the scenario where the potential buyer has a high debt-to-income ratio and would not qualify for a loan.<\/p>\r\n

That’s when business owners and someone looking to acquire a company turn to a leveraged buyout (LBO)<\/a>. An LBO considers working capital, previous mergers and acquisitions success, and the buyers’ potential accounts receivable.<\/p>\r\n

Learn what an LBO is and when it makes sense for small-business owners to consider below.<\/p>\r\n

What is a leveraged buyout (LBO)?<\/h2>\r\n

An LBO is when someone (a buyer who can be a small business or individual) takes over a company (acquired company) at the purchase price by putting up just a small amount of money. The buyer borrows the rest of the purchase price through a loan. That loan comes from the acquired company’s owner (the seller). This makes the seller the lender and is why you often hear it called seller-financing.<\/p>\r\n

With an LBO, a buyer does not have to use a significant amount of their own money. Nor do they have to raise large sums or borrow from private investors. Instead, the seller reviews the company’s cash flow, real estate market, and equity ratio of both the buyer and the acquired company. After all, who knows the acquired company better than the seller?<\/p>\r\n

What is the rate of return?<\/h3>\r\n

If the seller feels there will be future cash, and enough cash, under good management with the buyer, they will authorize an LBO. The rate of return is the time it takes for the seller to get their total asking price.<\/p>\r\n

What is equity?<\/h3>\r\n

Equity<\/a> is the valuation of a company. For small businesses, this includes the money value of:<\/p>\r\n