From a conceptual point of view, the concept of leverage refers to the relationship between the level of own resources and the level of external resources to be used when acquiring a given asset.

Focusing on the subject matter of this blog, and from a strict point of view of mergers and acquisitions (M&A), leverage is the relationship between the company’s own assets, or rather, the equity used to promote a sale and external resources in the form of loans or similar that the acquiring company requests to pay part of the price.

In this way we are presented with the concept of leveraged buy-out, or the acquisition by a company, or vehicle company (NEWCO), as we shall see now, of a target company in which most of the resources used to finance the acquisition will come from external financing that will be guaranteed with the assets and future cash flows of the target company.

 

Charateristics of LBOS

Generically speaking, an LBO can be structured either when the ultimate objective of its promoters is to favour the acquisition of the assets of the target company, or when the objective is the acquisition of the target company through its shares. In order to focus this analysis, we will talk about the LBO of the target company:

  • As its name indicates: the acquisition is leveraged, i.e. most of the resources used in the acquisition are external.
  • External resources are guaranteed by the target company.
  • The guarantee offered by the target company is usually in the form of its future assets and cash flows.
  • Obtaining external financing is subject to a notorious analysis and valuation of all the elements that make up the assets of the acquired company (financial analysis, cash flow generation capacity, management team, etc.).

 

LBOs types

  • MBO – Management Buy Out: in this case, the promoters of the purchase and sale of a given company are the managers of that company, who decide to take control.
  • MBI – Management Buy In: in this case, the promoters of the purchase operation of a given company are managers of a third company, other than the target company.
  • LEBO – Leveraged Employee Buy Out: in this case, the promoters of the purchase operation of a given company are the employees of that company, who decide to take control.

 

Importance of the concept of financial assistance in leveraged buyout

Financial assistance under company law consists of that legal transaction by virtue of which a company “assists” financially a third party external to it so that the latter may acquire the shares or holdings of that company, in other words, a company grants financing through its own assets to an external party so that the funds received are used for the purchase of its own shares or holdings.

Such a figure is prohibited by company law, and in this sense, the configuration of an LBO must be carried out with extreme caution, in order not to fall into a situation of financial assistance.

However, the mercantile legislation includes an exception to the aforementioned precept, which is that financial assistance in the case of public limited companies may be carried out when the business is aimed at facilitating the acquisition of shares by the company’s employees and, consequently, the requirement is the existence of an employment relationship between the individual acquiring the shares and the company.

 

LETSLAW

At LETSLAW we have a team of professionals who are experts in company law who can advise you when it comes to setting up an LBO that promotes the purchase and sale of a target company, as well as protecting you from the risks derived from financial assistance.