can someone explain “leveraged buyout”?
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Lets say you buy a home for 2M$. You don’t have a million, so you borrow 1.8M, You have taken on 1.8M in debt and receive an asset worth 1M personally.
Now, lets say instead the person you wish to buy from already had a loan of 1.8M. While you could get a new loan, pay the seller 2M, and have them pay off their loan, instead if the property is wrapped in a company, with the company owning the property and holding the loan, you could simply buy the company from the seller for 200K. The existing loan stays with the property and you save on financing costs!
Now imagine this same situation but the seller has a company with a 2M property and a 1M loan. You want to buy it. But you don’t want to spend 1M, you’d like to spend 200K.
Option 1: Take out a loan for 800K. Buy property for 1M. Receive a company with 2M in property, 1M in loans, and have a 800K personal loan. The seller receives his 1M in equity from the sale, and the buyer ends up with a 2M property and 1.8M in loans or
Option 2: Have the company refinance into a 1.8M loan, taking out 800K in cash. The seller withdraws the 800K in cash, and you pay him 200K, so he gets his 1M in equity. The buyer ends up with a company with a 2M Property and 1.8M in loans.
Option 2 is a leveraged buyout. These should have the same effect on the balance sheet. A leveraged buyout has some benefits though: If the company is limited liability, then the owner doesn’t take on personal responsibility for the loan, which is worth a lot. Also, the buyer doesn’t have to qualify for and find 1M in financing, only 200K. You can think of a leveraged buyout as a cash-out refinance against the business followed by a sale of the business with both assets and (the new) liabilities.
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