LBO, MBO, OBO:
buyout financing
with the right amount of leverage

Behind these acronyms lie very different stories. An LBO (leveraged buyout) is the acquisition of a company by a buyer — often backed by a private equity fund — through a holding company that takes on debt. An MBO (management buyout) is the in-house variant: the senior managers who run the business buy it, a scenario sellers often favour because it guarantees continuity. An OBO (owner buyout) answers a wealth-planning concern of the owner-manager: selling the company… to a holding company they control, turning part of their business assets into cash while staying at the helm. Each configuration has its own central question — finding the target and the financing for an LBO, raising the managers' equity contribution for an MBO, balancing liquidity and control for an OBO.

The common mechanism: an acquisition holding company (HoldCo) buys the shares, funded by an equity contribution and by acquisition debt. The target then pays dividends up to the holding company to service the repayments. The whole art of structuring comes down to one question: how much debt can the target really carry? The answer is not found in a fashionable multiple, but in a detailed analysis of normalised EBITDA, the recurrence of cash flows, upcoming capital expenditure and the seasonality of working capital. A comfortable DSCR (debt service coverage ratio) in the base case is not enough; it is in the downside case that a structure shows whether it is sound. Depending on the situation, the structure combines amortising senior debt, a bullet tranche, mezzanine and a vendor loan — the latter often being the link that completes the financing plan while aligning seller and buyer.

We work on both sides of the equation. On the deal side: valuing the target, structuring the holding company, calibrating the debt and the management packages when managers acquire equity. On the financing side: preparing the credit file, running a competitive process among the banks and debt funds in our network, negotiating covenants and security. Our commitment to explaining things clearly counts double on these deals: an LBO commits the buyer for seven or eight years, and we want you, at signing, to read your credit documentation as well as we do — what a covenant breach triggers, what an early repayment costs, what your “return to better fortune” clause (repayment of waived amounts if the company recovers) is worth. Buyers who understand their structure weather storms better; it is a constant across all the deals we have supported.