Selling Your Company? Top Ways Your Buyer Might Finance the Deal
If you are considering selling your company, the structure of the deal can have a significant impact on the value of your company as well as tax implications. Knowing the risks, costs, and benefits from the perspective of your buyer can be useful as you navigate a deal.
In this article, we’ll explore four basic ways deals get done.
Leveraged Buyouts (LBOs)
In this model, your buyer uses debt, typically in the form of bank loans or bonds, to acquire your company. The assets of your company are used as collateral.
LBOs are often used to acquire mature companies that have stable cash flows and are seen as undervalued or underperforming. An acquired company’s cash flows are used to pay off the debt, while also implementing operational improvements to increase profitability and ultimately sell a company for a profit.
If an acquired company is heavily in debt, there is risk if enough cash flow cannot be generated to pay off the debt.
Mezzanine Financing
This is a hybrid of debt and equity financing, where your buyer will provide a loan to your company that is subordinate to senior debt but senior to equity. Mezzanine financing typically has a higher interest rate than senior debt but lower than equity.
Mezzanine financing is also used to finance growth initiatives or acquisitions that require a significant amount of capital. This could be attractive If you don’t want to take on additional equity partners or give up control of your company.
There is significant flexibility with this model. Mezzanine financing can be structured in a variety of ways, including convertible debt, warrants, and equity kickers.
Senior Debt Financing
Senior debt financing involves a loan that has priority over other types of debt. From the buyer’s perspective, the risk is lower because it provides them priority over other types of debt if there’s financial trouble. Senior debt is secured by the assets of the company.
Senior debt typically has lower interest rates compared to mezzanine financing or equity financing. This can make it an attractive option for buyers that want to minimize cost of capital. Senior debt financing can be easier to obtain compared to equity financing, because collateral is available to secure the loan.
Equity Financing
Equity financing involves buying a stake in your company in exchange for ownership and a share of future profits. You are essentially sharing the risk with your investors. Equity financing can be structured in a variety of ways, including common stock, preferred stock, and convertible debt.
Equity investors often bring expertise and experience to the company, which can be leveraged to help your company grow and succeed.
The Bottom Line
There’s no one size fits all, and it’s not uncommon to see deals where a combination of financing vehicles are used.
Weighing options to sell your business? We’d love to help with that. Let’s talk.
Jennifer Clement is an executive sales and marketing leader specializing in value creation for the C-suite. In her current role at CLA, Jennifer collaborates on strategy with executives of global manufacturing and distribution companies to accelerate results. Previously Jennifer served as a Global Business Acceleration Leader for Complete Manufacturing and Distribution (CMD). During her time with CMD, Jennifer lived and worked in Asia from 2015-2019. Prior to CMD, she spent 10 years in senior care technology. Jennifer started her career at Johnson Controls (JCI) and spent nine years in leadership roles; followed by five years at Rockwell Automation (ROK) leading c-suite strategy and marketing operations.
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