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Leveraged buyouts have long been utilized as a means to
acquire businesses. A leveraged buyout, or LBO, involves the
use of borrowed money, in conjunction with equity capital,
to finance a change in a company’s ownership. A management
buyout is a type of LBO in which the acquiring group is led
by the target company’s existing management. Through these
transactions, operating management can acquire an ownership
stake in the business it runs.
Management teams often turn to equity sponsors for financial
backing when they have opportunities to acquire their
companies; however, there are many benefits of using
mezzanine financing in a management buyout including the
following:
- Management retains a larger ownership interest in
its business by using mezzanine rather than equity.
- While equity funds typically require significant
majority ownership positions, mezzanine investors are
often comfortable with smaller, even minority, ownership
stakes.
- Mezzanine is typically non-amortizing debt, reducing
demands on cash flow and providing management teams with
increased flexibility to operate their businesses
post-transaction.
- Interest payments on subordinated debt are tax
deductible reducing the acquired company’s tax burden
going forward.
Merit has supported a number of
management teams in acquiring equity stakes in their
companies. For further detail on specific examples, click on
the case studies below:
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