{"id":8825,"date":"2023-07-21T12:53:27","date_gmt":"2023-07-21T10:53:27","guid":{"rendered":"https:\/\/mbacapital.com\/?p=8825"},"modified":"2023-07-21T12:53:30","modified_gmt":"2023-07-21T10:53:30","slug":"montage-financier-lbo-acquisition-entreprise","status":"publish","type":"post","link":"https:\/\/mbacapital.com\/en\/montage-financier-lbo-acquisition-entreprise\/","title":{"rendered":"Acquisition of a company through a LBO"},"content":{"rendered":"

LBO, or Leveraged Buy Out <\/strong>\u00bb, is an effective tool used to acquire a company.<\/a>It enables an acquisition to be made with a minimum capital contribution in relation to the amount of the acquisition, using debt to the maximum. This maximises the return on equity invested also called \u00ab leveraging <\/strong>\u00bb.<\/em><\/p>\n\n\n\n

The key principles of LBO<\/h2>\n\n\n\n

The operation consists of the buyer, whether a group or an individual, creating a \"holding\" company that will acquire the shares of the target company. The holding company will then subscribe to a debt from one or several financial institutions, often amortized over 7 years, known as senior debt. This may potentially be supplemented by a bank loan repayable \"in fine\" and\/or the issuance of bonds or other hybrid securities.<\/p>\n\n\n\n

Finally, it may be necessary to supplement the capital brought by the buyer to the holding company with an equity contribution from external investors, such as investment funds or business angels, referred to as \"sponsors.\" If the LBO transaction can be carried out solely through the equity investment of the acquirers and\/or managers and bank debt, it is called a \"sponsorless\" LBO.<\/p>\n\n\n\n

The debt incurred by the holding company will then be repaid using the cash flows generated by the target company, through the distribution of dividends to the holding, its parent company.<\/p>\n\n\n\n

This setup allows the acquisition of a company with minimal capital input, and leverage will help increase the return on invested capital.\u00a0<\/p>\n\n\n\n

The functioning of a LBO through an example<\/h2>\n\n\n\n\n
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\n Un acqu\u00e9reur souhaite acqu\u00e9rir une soci\u00e9t\u00e9 valoris\u00e9e 10 M\u20ac, qui g\u00e9n\u00e8re 1,4 M\u20ac de r\u00e9sultat net par an. Il dispose de 3 M\u20ac. \r\n\r\nIl cr\u00e9e une soci\u00e9t\u00e9 holding qui ach\u00e8tera 100% de la cible et apporte en capital ses 3 M\u20ac \u00e0 la holding. La holding souscrit 7 M\u20ac de dette senior sur 7 ans, \u00e0 un taux annuel par exemple de 5%, ce qui correspond \u00e0 des \u00e9ch\u00e9ances annuelles de 1,2 M\u20ac environ. Chaque ann\u00e9e, la soci\u00e9t\u00e9 cible va verser 1,2 M\u20ac de dividendes \u00e0 la holding pour que celle-ci rembourse ses emprunts. \r\n\r\nA l\u2019issue des 7 ans, la holding aura totalement rembours\u00e9 sa dette. En supposant de fa\u00e7on tr\u00e8s prudente que la valorisation de la soci\u00e9t\u00e9 cible n\u2019a pas \u00e9volu\u00e9 pendant cette p\u00e9riode, l\u2019acqu\u00e9reur d\u00e9tiendra donc 100% d\u2019une soci\u00e9t\u00e9 holding, qui poss\u00e8de 100% d\u2019une soci\u00e9t\u00e9 cible valoris\u00e9e 10 M\u20ac et n\u2019a plus de dettes. La holding vaudra donc 10 M\u20ac. \r\n\r\nL\u2019acqu\u00e9reur aura investi 3 M\u20ac et d\u00e9tient les titres d\u2019une holding qui vaut maintenant 10 M\u20ac. Il a donc multipli\u00e9 la valeur de son investissement par 3,3, juste par le m\u00e9canisme de l\u2019effet de levier.\r\n <\/p>\n\n \n <\/div>\n

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\n\n \n \n \"Fonctionnement-LBO-exemple\"\n\n <\/div>\n\n <\/div>\n\n <\/div>\n<\/div>\n\n\n\n\n

This structure is particularly suitable for the acquisition of a company by its managers, an operation known as an LMBO (Leveraged Management Buyout), or by an external manager in an MBI (Management Buy-In), provided, of course, that the company is sufficiently profitable.
It's worth noting that one of the advantages of a LBO setup is that it compels the implementation of management tools, reporting, and cash flow monitoring within the company (if not already in place). This is done to ensure the adherence to the business plan and debt repayment schedule.<\/p>\n\n\n\n

Other LBO leverage effects<\/h2>\n\n\n\n

The creation of the acquisition holding allows for the implementation of three other types of leverage effects:<\/p>\n\n\n\n

Legal leverage<\/h3>\n\n\n\n

With a holding company and minority shareholders, an acquirer can control a target company with an investment that wouldn't allow them to have a majority stake if they were to directly acquire the target. This mechanism can be achieved \"in cascade.\"<\/p>\n\n\n\n

Thus, in the event that the acquiring manager does not have sufficient capital to have a majority stake in the acquisition holding company (Holding 1), instead of directly investing in it, they can invest through their own holding company (\"Holding 2\") by bringing in minority investors as shareholders in Holding 2.\u00a0<\/p>\n\n\n\n

For example, in the scenario mentioned above, the buyer has only \u20ac1 million (instead of the required \u20ac3 million) to acquire the target company valued at \u20ac10 million. They find investors willing to invest \u20ac1.5 million in the capital of the acquisition holding company (Holding 1). If the acquirer were to invest directly in Holding 1, they would have a minority stake with only 33% of the capital.  <\/em><\/p>\n\n\n\n

Therefore, he creates Holding 2 with his \u20ac1 million contribution and bring in minority investors (possibly through love money) with \u20ac0.6 million in capital for Holding 2. This give him a 62.5% ownership stake in Holding 2, where he serves as the chairman and have control. Holding 2 invests its \u20ac1.6 million capital in Holding 1 for the acquisition, and \u20ac1.4 million is contributed by investors in Holding 1. Holding 2, represented by the acquirer, holds a majority stake of 53.3% in Holding 1 and controls it. Finally, Holding 1, with the required \u20ac3 million in capital, acquires the target company as outlined in the previous structure.<\/em><\/p>\n\n\n\n

This \"cascading\" structure allows the acquirer to control the target company, even though they indirectly own only 33.3% (62.5% x 53.3%) and have invested only \u20ac1 million out of the required \u20ac3 million in capital.<\/em><\/p>\n\n\n\n

Tax leverage<\/h3>\n\n\n\n

In a tax consolidation scheme, the tax deficit of the holding company (related to financial expenses) reduces the corporate income tax of the tax group (holding + target).\u00a0<\/p>\n\n\n\n

Managerial leverage<\/h3>\n\n\n\n

The participation of key executives in the capital and, if applicable, their incentive to share in the financial partner's profit, are motivating factors that bring dynamism to companies acquired through LBOs.<\/p>\n\n\n\n

In this case, \u00ab\u00a0management packages<\/a>\u00a0\u00bb (\u00ab\u00a0MANPACK \u00bb).<\/em>\u00a0These mechanisms are put in place and are particularly attractive for managers, often allowing them to significantly multiply their investment.<\/p>\n\n\n\n

LBO's limits<\/h2>\n\n\n\n

The possibility of acquiring a company through a LBO depends on several factors, including :<\/p>\n\n\n\n