What is a leveraged buyout of a small business?

What is a leveraged buyout of a small business?

On Behalf of | Jun 29, 2018 | Uncategorized |

It’s time to move forward and sell your small business. Many small businesses are built from the ground up, and while it can be a decision based on many factors, there are several means and situations that could dictate how the final sale of a small business is completed. Oftentimes, small businesses are bought by other small business owners or even a hopeful small business owner. Sometimes the capital these buyers need isn’t readily available in total.

What is a business owner or business owner-hopeful to do? For small businesses specifically, there is a process called a leveraged buyout in which it can allow for the process of a sale of a business to be completed, even if the corresponding equity isn’t available per the buyer. In this process, a buyer purchases a company by putting up only a small amount of money and borrowing the rest through a loan-as opposed to paying for the sale entirely with the buyer’s own money or raising funds from the buyers own investors. The sale is then ‘leveraged’ by taking the business’s existing assets and prior sales revenues as proof that the buyer’s able to pay back the debts taken out to buy the business.

Usually the money put down against the amount leveraged is 10 percent, but every scenario is different. There are other reasons to use a leveraged buyout to achieve some sort of business goal, and they aren’t unheard of in publicly traded companies either. It’s good to know that a company must be profitable in order to achieve a process of a leveraged buyout of a small business. Usually it doesn’t require anything special of the seller of the business in comparison to any regular sale, as their buyout comes mostly from the lending institution rather than a private party.

Business owners shouldn’t necessarily shy-away from this type of sale process when looking to sell their business. Small businesses are often best kept small, run by a small team, rather than being susceptible to the business landscape larger, publicly traded companies often are. Understanding the means in which a person or party may wish to purchase your small business gives you more options when looking to sell your small business. Leveraged buyouts could allow a family member or employee to purchase a small business they have worked at for years.