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Fundraising

How to buy your company through debt ? 

Leveraged buyout : LBO, MBO, MBI

Buying a company, including your own, can be a lever for growth, transfer, or asset management strategy. Among the financing solutions, structured debt is one of the most widely used, particularly through arrangements such as LBO (Leveraged Buy-Out), MBO (Management Buy-Out), or MBI (Management Buy-In).
These techniques are based on a simple principle :
acquire a company by leveraging primarily debt, while limiting the contribution of equity. This allows you to leverage financial leverage to maximize the profitability of the transaction.

What is an LBO (Leveraged Buy-Out) ?

Objective :
An LBO aims to acquire a company by taking on debt through a holding company structure. This arrangement allows investors to use the company’s future earnings to repay the debt incurred for its acquisition.

How it works :

  • A holding company is created specifically for the transaction.
  • It borrows from banks or investors to purchase the target company.
  • The acquired company’s cash flow is then used to repay the debt.

This arrangement is often used for the acquisition of SMEs, mid-caps, or family businesses, but can also apply to listed companies.

Advantages :

  • Leverage : Allows for an acquisition with little initial capital.
  • Tax optimization : Loan interest is often deductible.
  • High profitability : If the company performs well, shareholder returns are high.

Risks :

  • Debt : Weakens the company if results are insufficient.
  • Financial pressure : A large portion of profits is used to repay debt, limiting investments.

What is an MBI (Management Buy-In) ?

Definition :
An MBI is the opposite of an MBO. It involves the acquisition of a company by an external management team, which takes over from the previous management.
This type of arrangement is often led by investment funds associated with experienced managers.

Advantages :

  • New talent and strategic perspectives.
  • Potential for restructuring or reviving a struggling company.
  • Exit solution for the seller, who can transfer the business to skilled professionals.

Limitations and risks :

  • Adjustment period for the new team.
  • Risks related to corporate culture or internal resistance.
  • Less knowledge of the company by the buyers, making due diligence crucial.

What is an MBO (Management Buy-Out) ?

Definition :
An MBO is a specific form of leveraged buyout in which the company’s managers or employees acquire it. In French, it is also referred to as an Employee Buyout (EBO).

When to use it ?

  • Upon the retirement of the manager.
  • In the absence of family succession.
  • When a group wishes to sell a subsidiary to its management.

Terms :

  • The managers create a buyout holding company.
  • They invest a portion of their own funds.
  • The remainder is financed by bank debt or private equity.
  • The seller can sometimes retain a minority stake.

Advantages of an MBO :

  • Alignment of interests between managers and shareholders.
  • Increased motivation of the management team.
  • Lenders’ confidence : managers have in-depth knowledge of the company.

Risks :

  • The buyers must assume the burden of the debt.
  • Risks of conflicts of interest if the valuation is deemed too low.
  • In the event of operational failure, the debt remains to be repaid.

What structure should you choose to buy your company through debt ?

The choice between an LBO, MBO, or MBI depends on several criteria :

  • Your current position in the company (internal or external).
  • The acceptable level of risk.
  • Financing capacity.
  • The company’s profile (profitability, cash flow, outlook).

In all cases, it is essential to seek the support of experts in structured finance, corporate law, and acquisition strategy.

methode dcf evaliance capital

THE EVALIANCE CAPITAL APPROACH

BUYING YOUR COMPANY WITH LEVERAGE, A HIGH VALUE-ADDED STRATEGY

Acquiring a business through debt financing is a powerful strategy for gaining control of a high-potential asset while limiting initial capital requirements. Although risky, this approach can generate high returns for buyers.
Whether you are an existing manager looking to take over your business (MBO), an external investor ready to restructure a company (MBI), or an entrepreneur seeking a leveraged buyout (LBO), each arrangement has its own specificities.
To maximize your project’s chances of success, don’t hesitate to seek advice from financial engineering experts, such as Evaliance Capital, who specialize in financing business acquisitions.