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Leveraged Buyout Financing for Small Businesses

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❶Making an inquiry to a company about buying they're business can lead you into the prime land of opportunity. Correct Answers - points.

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How to Acquire a Company Using a Leverage Buyout
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Because if for any reason you didn't make the payments on that loan, the dealer would take that car back. The car is an asset; the collateral on the loan you made. There are lenders out there who will make asset based loans not just for individuals who want to buy vehicles - but who will lend out money to businesses and take back as collateral for that loan any form of business asset: So you investigate further into the Dirtbike parts manufacturer you want to buy and it's current assets.

Liquidation value is the estimated amount of money that an asset can quickly be sold. Such as in the event of a company bankruptcy. So you find an asset based lender. The catch of course is that first you have to actually own those assets. If only there was a way to perform a deal where you could take out a loan for the value of assets in a company you were about to buy After a little more research you discover that you can go to a bank - and get what's called a "swing loan.

Give that to the seller: So you goto a bank in your best business suit and reveal to the Senior Loan Officer your grand plan. He sits back very politely listening to your grand plan. When you're all finished revealing the plan he leans across the desk and looks at you from the corner of his thick black glasses.

Banker says, "Great plan you have there So you've come this far only to be presented with another challenge. Fortunately this will be the last challenge you'll need to overcome - and there is an easy way to go about it. It's called "double escrow. Because the moment you make that loan: Now we're playing like big boys.

In fact, doing a seemingly impossible business deal is not so hard once you realize that it is indeed possible and break it down into a simple strategy. On the day of closing there are three people in Room A. The seller, you the buyer, and the banker. Sitting on the table in front of you were all the legal documents to legally transfer ownership of the company from the seller to you.

You take the check, give it to the seller - and the moment the seller touches that check: You are now the legal owner of that business.

Meanwhile in Room B, there are two more people: Sitting on the table in front of them are documents you signed before you went into Room A, but you signed those documents as if you were the owner of that business. So the moment you completed the deal in Room A, the banker in Room B can hand these documents to your asset based lender. In a nutshell, the full leverage buyout strategy is to arrange a loan with an asset based lender, for the amount of the value of the assets in the company you want to buy, effective immediately upon the moment you take ownership of that business.

You then arrange for a swing loan at your bank. The proceeds of the swing loan is to be paid directly to the seller to give him the down payment - making you the owner - and once you are the owner your asset based loan is automatically activated, and a portion of the asset loan instantly pays off the swing loan. The way you buy a business with no cash of your own is by arranging an asset based loan and a swing loan connected by a double escrow.

And you can do it without good credit. The deal is setup so you win, the seller wins, and the banker wins. And this is just to complete the deal. The risks can be significant, even for a well-managed and successful business. Managers can largely reduce the stress by understanding the lessons learned by managers and advisors who have been through the process before them. You and your MBO team might all invest the same amount of money, so some of you might think that you should all have the same say in running the business.

No organization can operate without a leader — someone has to have the final say and make the tough decisions. While MBO companies typically have better corporate cultures than non MBOs, they still require the presence a strong capable leader. There are various sources of financing that may be available to complete your deal — banks, term lenders, subordinated debt providers, private equity, vendor financing — all of which have different costs and attributes.

Banks are your cheapest form of financing but they have strict rules that you need to live with while private equity is very expensive but also very patient.

You may well be tempted to go for the cheapest financing and the one that allows you to keep the most equity for yourselves. This may not be the best approach. Because the financing that you get to buy your company must also allow you to grow the company and weather the bumps along the road that you will inevitably experience. This means financing your MBO with more equity type money and less bank debt. Obviously you need to treat all your financial partners with openness, honesty and full disclosure.

There is probably not a more critical document for you and your managers in the Management Buyout than the Shareholders Agreement and it can also be one of the most difficult to craft properly.

How a shareholder exits the business and how, and at what value, do they sell their shares is a key topic that needs to be spelled out in the Shareholders Agreement. While many of these topics can result in fairly emotional discussions, getting these important issues on the table before you close the deal will allow you to avoid massive headaches and disruption down the road. The best candidate for a Management Buyout is a business or business unit that can assume debt and is stagnating because management is being prevented from unlocking upside revenue opportunities by the current owners.

In order to unlock the revenue potential, the MBO plan often calls for increased investment in product development, new equipment, staff training, marketing, and in the case of "carve outs" of non-strategic assets, a new accounting system.

The management must operate as a team that can adapt to the new environment and unlock the upside revenue and accomplish other key objectives.

If there are fault lines within management, they will be exposed. The sooner these issues are dealt with candidly and honestly, the greater the are chances of success of the Management Buyout. Once a business owner has agreed to sell his company to members of his staff, there are usually a series of common steps in the transfer of power: Buyer and seller agree on a sale price.

A valuation of the business confirms the agreed-upon price. Managers assess the portion of the shares they could purchase immediately, and then draft the shareholder agreement. Financial institutions are approached. A transition plan is developed that incorporates tax and succession planning. Managers buy out the sellers' interest with financial support. Decision-making and ownership powers are transferred to the successors; this can take place gradually over a period of a few months or even a few years.

Managers pay back the financial institution. This is done at a time and pace that will not unduly slow the growth of the business.

Conduct a thorough financial analysis Buyers will need to ensure that the venture is profitable or at least has good potential to be. Consider different types of financing Any of these types of basic financing may be combined to achieve a successful transition. Personal funds can help secure confidence from a financial institution, add equity to the transaction and share risk. Buyers often need to invest a significant amount of personal money—which may involve refinancing personal assets—to demonstrate their commitment.

Loan or credit notes from banks are often used to purchase owner shares in the business. This type of financing is attractive because of its simplicity—assets are used as collateral—and because interest rates are lower.

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Leveraged Buyout Financing for Small Businesses Most people consider leveraged buyouts to be solutions that can only be used to acquire larger businesses. However, nothing about a leveraged buyout is specific to larger business.

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She is a coauthor of Business Buyout Agreements: Plan Now for Retirement, Death, Divorce or Owner Disagreements, Save Your Small Business: 10 Crucial Strategies to Survive Hard Times or Close Down & Move On, Bankruptcy for Small Business Owners: How to File for Chapter 7, and Nolo's Online LLC. Over the last decade she has been .

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Employee Stock Option Plan. Small-business owners with loyal employees who have expressed an interest in owning the company can engineer a buyout of their ownership stake in the company through the creation and funding of an employee stock option plan, or ESOP. The owner establishes an ESOP and contributes all of his shares to the plan. Buy-Out Plan® is a dealmaking software system for “Main Street” business buyers and business brokers who want a step-by-step guide through the process of analyzing and valuing a small business like a pro.

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The buyer(s) will need to develop a strong business plan to prepare for the acquisition. The forecast should be credible and realistically attainable. Personal and business contacts and referrals can also help a successor secure confidence from bankers. A small buyout usually involves only one institution. Transferring Your Company to Key Employees White Paper Owners wishing to sell their businesses to management (key employees) face one management buyout, your business should • The initial purchase price will be paid in To establish a plan .