Acquiring company borrows majority of funds required to finance a purchase. Buyer intends to repay the debt from acquired company’s cash flow or by sale of its assets. The large amount of debt associated with these transactions presents higher risks.
Leveraged buyout financing is normally structured with asset-based loans. The amount of financing is based on a company’s cash flow or accounts receivable. Company must have a good accounts receivable aging and customer payment history.
Cost of Leveraged Buyout loan depends on the company’s credit strength and collateral.
Companies that qualify for Leveraged Buyout lending:
- Sales from $1 million to $20 million
- Sound management with good financial controls
- Predictable cash flow and sales growth
Take a look at Khan Academy’s wonderful video to learn more about Leveraged Buyouts (LBO):