How to Acquire a Company Using a Leverage Buyout
How can you buy a business with no cash of your own? It's actually simpler than you might think. And surprisingly few people know about the strategy - so I'm going to spill the beans on this arcane method right now.
The way you do it, is by leveraging the assets of the specific business you want to buy: at about exactly the same time you buy that business.
It's called a full leverage buyout: acquiring a company by using the assets and cashflow of that company to finance the purchase.
Although the strategy is generally unknown to most internet nerds and even general business owners: big corporations have been doing it for a long time. And the strategy has become an accepted and widely practiced financing strategy.
But nevermind the big corporations. For the small business owner or an individual starting with little or nothing: leveraged buyouts can effectively help you skip the 2 to 5 years it generally takes to build a strong company.
What this means is that instead of wasting years painfully trying to grow your business with your own money: you can take over an existing business and begin reaping the rewards within literally weeks or a few months.
For this reason - many people, particularly those of us who already own our own businesses - experience a paradigm shift after learning about how to do leveraged buyouts. Because we suddenly see the potential for a totally new way to go about building a successful business.
We assumed the way to do it was by saving up the initial capital by scavenging every penny and pressuring friends and family to come up with some money.
Then by starting the business from scratch and working 15 hour days while putting your savings and everything you've got on the line.
As the business grows, any profits are immediately put back into the business with barley anything to show for it personally - and this is continued for however many years it takes for your business to finally start supporting you instead of you supporting it.
Then we learned that with leveraged buyouts, none of our own personal cash or credit gets put on the line. And your business can immediately start producing wealth for you. And that this strategy can be repeated to buy even more businesses and accumulate even more wealth.
Owning a business is the ultimate wealth generator but the difference between just getting buy and making a fortune in business is your knowledge of modern day business strategies such as the full leverage buyout.
How to do a Full Leverage Buyout
Here is brief guide on the entire process...
First Step: Find a business you want to buy
As obvious as the first step may be, it's certainly something you will want to think carefully about. Do you have an existing business? Can you buy another business that will complement what you're already doing? Or are you sick of your current business and want to find something new? If you don't have a business already - what's your passion? What are your hobbies?
Remember - you're the one who has to open the doors every morning. Find a business you have a passion for.
Build a criteria of what kind of a business you're looking for, research and compile a list of the potential companies you want to own - even if they're not for sale. Because some of the best deals never go public - and the key to finding them is to ask. Making an inquiry to a company about buying they're business can lead you into the prime land of opportunity.
Other sources of businesses for sale include online marketplaces, directories, newspaper classifieds and business brokers.
Let's say you love to ride Dirtbikes. But you're only age 19, just a year out of school and you have basically no savings of your own. In fact, you've got bills to pay and some credit card debt. That's okay: using full leveraged buyouts you don't need any of your own money.
So, let's find a business in that field.
It just so happens you're friend works for a Dirtbike parts manufacturer. And by working within that company he's got some early new information about his boss, the owner, and his intentions to sell the company.
Second Step: Interview the seller
Once you've identified a business you want to buy (and one that is willing to sell) your next step is to meet the owner and begin an interview. This is a lot easier than a job interview - because you've got all the cards at this point. It's up to the seller to make a pitch to compell you to buy his company.
In this example, you setup a meeting with the dirtbike manufacturer through your friend who was actually working for the company.
You sit down with the owner to ask some important questions:
What's the sales revenue?
Mr. Seller tells you , "the business does about $1 million per year."
What's the profit?
"The profit is $100,000 net after tax. And this is after the owner's salary and my perks."
Now you start digging deeper: what's the value of the inventory? What's the value of the equipment?
After a brief interview, you and Mr. Seller take a tour of the facility. You find it incredible how much insight you can gain into a business by being in the position of a potential buyer for that that business.
Back in his office, you then ask the big question: how much do you want?
Mr. Seller: "I want $500,000."
Well okay, what kind of terms are you looking for?
Yikes - that sounds pretty intimidating. Somehow you need to come up with $500,000 in cash you don't have. Yet nothing is impossible, so you pursue the effort to buy this business.
Third Step: Negotiate the Deal
Now is when the real negotiations start. The key to any successful negotiation is to find out more about what the other side wants.
So you build the relationship even more by asking more down to earth questions. What do you intend to do after you sell the business? What is your vision for your company, after you sell the business?
You find out that the owner is ready to retire and wants to see his business passed down to someone responsible who will grow the company and keep it a striving business for a long time to come.
So you assume if the seller is wanting to retire, surely they would appreciate an extra stream of income to help compliment their lifestyle.
Given this factor; and if you can prove to the seller, that because of your passion for the industry and willingness to commit long term, that you are indeed the best person to own the business - you might just be able to get some more flexible terms, while making them just as advantageous and satisfying for the owner.
After about 4 weeks of negotiations and building a bond with the seller - you've finally hammered down some more realistic terms that work best for the both of you.
Mr. Seller still wants $500k but he agreed that he would accept $150,000 cash down. And the remaining balance of $350,000 would be paid with a note that would be payments of principal and interest monthly for 15 years.
Great! Payments on the 15 year note should be easy: once you take ownership of the business, you step into the owner's salary and perks, and that's going to take real good care of you and your lifestyle. And then from that $100k net after tax profits - you can easily make the payments on the $350k note payable over 15 years and still have profits left over.
What you are worried about: is how to make the $150,000 up front cash payment.
Fourth Step: Get an Asset Based Loan
The key step now is to find an asset based lender.
You already are familiar with these types of lenders. If you have ever went to a car dealership to buy a car with monthly payments - you've just finished a negotiation with an asset based lender. Because if for any reason you didn't make the payments on that loan, the dealer would take that car back. The car is an asset; the collateral on the loan you made.
There are lenders out there who will make asset based loans not just for individuals who want to buy vehicles - but who will lend out money to businesses and take back as collateral for that loan any form of business asset: cars & trucks, machinery & equipment, accounts receivable, or land.
So you investigate further into the Dirtbike parts manufacturer you want to buy and it's current assets. Inside the business, which has a total purchase price of $500,000 - there is $300,000 worth of machinery, equipment and accounts receivable at liquidation value.
Liquidation value is the estimated amount of money that an asset can quickly be sold. Such as in the event of a company bankruptcy.
So you find an asset based lender. He agrees to take your $300k worth of assets and loan you upto 80% of the liquidation value, or upto $240k.
The catch of course is that first you have to actually own those assets.
So close! If only there was a way to perform a deal where you could take out a loan for the value of assets in a company you were about to buy...
Well, you're in luck. Because that my friend, is the essence of a full leverage buyout.
Fifth Step: The Swing Loan
After a little more research you discover that you can go to a bank - and get what's called a "swing loan."
In other words, you can borrow a $150,000 from a bank in the morning. Give that to the seller: making the business yours.
Then in the afternoon take the assets within the business you just bought, pledge it to the asset based lender raising $240k from them and from that $240k immediately repay the bank $150k and have $90,000 left over. Not bad!
So you goto a bank in your best business suit and reveal to the Senior Loan Officer your grand plan. He sits back very politely listening to your grand plan.
When you're all finished revealing the plan he leans across the desk and looks at you from the corner of his thick black glasses. Mr. Banker says, "Great plan you have there... but you don't really expect us to loan you this kind of money? You don't have the type of credit to even allow us to consider lending you $150,000 no matter how great your plans may be."
So you've come this far only to be presented with another challenge. Getting someone to trust you for one day with $150k.
Fortunately this will be the last challenge you'll need to overcome - and there is an easy way to go about it. It's called "double escrow."
"Mr. Banker," you say. "I understand I don't have the credit for this loan - which is why we're going to make this transaction right here so the money will never leave your bank. Because the moment you make that loan: that same instant I'll pay the loan off, and also that same instant I'll put $90,000 of my money into a checking account in your bank as additional incentive to help me facilitate this transaction."
Now that's pretty hard to refuse: it's a no risk deal for the banker.
Sixth Step: Double Escrow
Now we're playing like big boys. In fact, doing a seemingly impossible business deal is not so hard once you realize that it is indeed possible and break it down into a simple strategy.
You have the banker setup two rooms at the bank. Room A and Room B.
On the day of closing there are three people in Room A. The seller, you the buyer, and the banker. Sitting on the table in front of you were all the legal documents to legally transfer ownership of the company from the seller to you. You both sign the dotted lines, exchange your copies and then the banker hands you a check for $150,000 made payable to the seller. You take the check, give it to the seller - and the moment the seller touches that check: the deal is done. You are now the legal owner of that business.
Meanwhile in Room B, there are two more people: another banker of the same branch and your asset based lender.
Sitting on the table in front of them are documents you signed before you went into Room A, but you signed those documents as if you were the owner of that business. So the moment you completed the deal in Room A, the banker in Room B can hand these documents to your asset based lender. The asset based lender then hands him a check for $240,000 made payable to you. The banker then takes it to the tellers window, deposits it to your account, and immediately deducts the $150,000 swing loan. Leaving you with $90,000 in cash.
Congratulations, you've just purchased a business with none of your own cash.
In a nutshell, the full leverage buyout strategy is to arrange a loan with an asset based lender, for the amount of the value of the assets in the company you want to buy, effective immediately upon the moment you take ownership of that business.
You then arrange for a swing loan at your bank. The proceeds of the swing loan is to be paid directly to the seller to give him the down payment - making you the owner - and once you are the owner your asset based loan is automatically activated, and a portion of the asset loan instantly pays off the swing loan.
None of your own cash or credit
The way you buy a business with no cash of your own is by arranging an asset based loan and a swing loan connected by a double escrow.
And you can do it without good credit. The deal is setup so you win, the seller wins, and the banker wins.
The masterful example above is based on a real experience from Gordan Bizar - an expert in business buyouts and considered by many as a pioneer in small businesses leverage financing. You can learn more about Gordan at Bizar Financing.