Leveraged Buyout (LBO) Primer
What is a Leveraged Buyout (LBO) and what are the ideal financial characteristics of a LBO target company in the eyes of private equity investors and family offices? Keene Advisors helps to demystify the LBO process.
A leveraged buyout (“LBO”) is an acquisition of a company (the “Target”) by an investor or group of investors (the “Buyout Investors”), who use debt to fund a significant portion of the purchase price. The assets of the Target are used as collateral, and the cash flow of the Target is used to pay interest and principal on the debt. Buyout Investors typically borrow between 50-75% of the total purchase price and invest 25-50% of equity to finance the remaining portion of the purchase price.
Buyout Investors compete against corporations and other Buyout Investors for acquisition opportunities. Typically corporations have a lower cost of borrowing and much lower cost of equity capital. As a result, Buyout Investors are best positioned to deploy capital when interest rates are low, the lending environment is favorable (higher leverage, less restrictive covenants, etc.), and valuations are moderate.
Navigating the Market During the Covid—19 Crisis and Beyond
Blog post by Founder and President, Travis Borden
Find out what strategies publicly traded companies are pursuing in the face of market disruption, which ones they might turn to if the downturn is protracted and what they might do once the recovery gets underway.
In the current environment, public companies are following similar playbooks to preserve cash and position themselves for long-term success. Their actions offer some lessons for private and family owned businesses struggling in the current environment. In the great recession, quick decisive action was critical for companies to survive the downturn and thrive in the recovery. At Keene Advisors, we expect quick decisive action to be critical for companies in this environment too.
Public companies, executives and Boards are taking decisive action, including to:
1. Maximize liquidity
a. Drawing down on their revolving credit facilities
b. Temporarily pausing share repurchase programs
c. Pursuing divestitures of non-core assets
d. Considering changes to dividend policies
e. Extending trade payables
f. Accelerating collection of receivables and liquidation of inventory
2. Reduce costs
a. Cutting executive compensation and/or discretionary compensation
b. Cutting Board of Directors cash retainers / compensation
c. Closing offices, retail stores, distribution centers, etc.
d. Furloughing or laying-off employees
3. Develop processes and procedures to keep employees safe
a. Implementing processes and procedures to promote social distancing
b. Implementing remote work and telecommuting programs
c. Increasing direct employee communications
d. Providing additional PTO
4. Develop new solutions and delivery methods for customers
a. Developing alternative distribution models to meet customers emerging needs and promote healthy and safe interactions between customers and employees
b. Adding additional customer support (call centers, etc.)
5. Others
a. Rescheduling investor meetings
b. Eliminating forward guidance
c. Updating risk disclosures
d. Announcing donations to charities
If the market downturn is protracted, public companies will likely pursue more dramatic measures, including:
1. Debt relief
a. Pursuing waivers for covenant violations
b. Amending credit agreements and bond indentures agreements
c. Extending maturities of existing debt
d. Tendering for debt trading at a discount
2. Deleveraging
a. Raising equity from new investors (registered offerings, PIPEs, etc.)
b. Selling non-core assets and businesses
3. Strategic mergers and acquisitions
a. Merging with or acquiring competitors to gain efficiencies of scale, rationalize expenses, etc.
b. Merging with companies with stronger a balance sheet to secure liquidity and access to capital
4. Sale transaction
a. Sell to a larger, better capitalized company to preserve value for stakeholders
5. Out-of-court restructuring
a. Negotiating deals / workout among creditors and the company typically utilizing exchange offers, rights offerings and other tools
6. Bankruptcy – Chapter 11 and Chapter 7
a. Plan of Reorganization
b. Section 363 Sale Process
As the economy begins to recover, companies will begin exploring strategies to grow and enhance value for stakeholders, including:
1. Raising growth capital
a. Raising junior capital (debt and equity) to capitalize on organic and acquisition-driven market opportunities
2. Strategic acquisitions
a. Acquiring competitors to gain market share and accelerate growth
3. Returning capital to shareholders
a. Reinstating / initiating share buybacks to capitalize on lower prices
b. Reinstating / increasing dividends
Our team at Keene Advisors combines investment banking, consulting and operating experience to help you navigate strategies through any economic environment or business cycle. If you would like to discuss how COVID-19 is impacting your business and how to position your company to thrive, please contact us at 617-765-2054 or Info@KeeneAdvisors.com.
Capture Value with a Winning M&A Pipeline
An effective M&A pipeline is an important component of many companies' growth strategy. Over the past few years of advising companies and private equity firms, we have compiled a list of best practices and useful, customizable resources.
In M&A, much like in other aspects of life, discipline pays. Companies that prepare and thoughtfully execute on acquisition strategies can drive superior value. Companies that remain inactive in the field of mergers and acquisitions potentially miss out on additional value. Simply put, disciplined acquirers outperform.
A strong process is a hallmark of discipline. At Keene Advisors, I often help clients develop and execute on acquisition pipeline strategies. Throughout our assignments with clients spanning billion-dollar companies and middle market private equity firms, we have compiled best practices and resources to streamline the acquisition pipeline process. Read below for helpful guidance and scroll to the bottom to download customizable templates.
Define your universe. Determine the parameters—size, geography, capabilities—that define an attractive acquisition opportunity for your company. Be intentional in your search and keep specific criteria in focus as you assemble your pipeline.
Find your goldmine. In this context, a goldmine is a source of numerous attractive targets. These sources may include relevant expo exhibitor lists, business directories, industry association membership lists, public/private databases, regional business journal publications, etc.
Create a template. Maintain consistency and achieve efficiency by gathering pre-determined fields of information. Pursue a balance where each entry contains just enough information to conduct a quick evaluation of the target while remaining concise enough to allow easy navigation of the database.
Keep a scorecard. Rank targets based on how closely they adhere to the elements you are looking for in a potential acquisition and how actionable the opportunity appears to be. Identifying which companies rank “High” versus “Medium” or “Low” is useful when deciding how to deploy effort and resources in pursuit of a deal.
Match the talent to the task. A smart division of labor ensures everyone is delivering the highest-value work they can produce. Sometimes it means delegating to free up time better spent elsewhere; sometimes it means partnering to get the most efficient execution. Because timing and thoroughness are key in an acquisition process, commit to an agile process.
Luckily, there is no need to reinvent the wheel when it comes to building an acquisition pipeline. Leverage the resources we created to stay a step ahead in your own process. Click below to download an Excel template for a database of potential targets and a PowerPoint template for company profiles.
What You Need to Know about Selling a Private Company
Frequently Asked Questions (FAQ) about selling a private company.
We receive many questions from private, founder- and family-owned companies across a broad range of industries about the corporate sale process. Here we provide answers to those frequently asked questions.