A buyout is an investment transaction where one party gains a controlling interest in a another company either through a direct purchase or by obtaining majority of its voting shares.
Buyouts usually take place when the purchaser believes that the target company is undervalued or underperforming, but shows indications that it could perform more efficiently under new ownership and create more value for its shareholders.
In some cases, buyouts are initiated by business owners as part of their exit strategy. However, they can also stem from unforeseen events that have compromised the organization’s financial and operational sustainability.
Today, as companies around the world struggle to recover from the harmful impacts brought by COVID-19 on the global economy, expert dealmakers predict an increase in “owner managers selling, private equity buying and employees sharing” businesses in the post-pandemic era.
Some owners are expected to put their businesses up for sale, even at a bargain, simply because they no longer have the interest or the resources to rebuild. Others, on the other hand, will be motivated to sell parts of their business in order to attract fresh capital.
Ultimately, the goal is to arrive at a win-win situation that would satisfy both sides of the transaction, with the advantages and disadvantages carefully weighed and considered.
This is where performing comprehensive due diligence with an experienced partner like Veritas Global becomes critical to the buyout transaction process.
High risks, high rewards
Buyouts occur when the purchaser acquires more than 50% of the voting shares in a company, signaling a turnover of control or ownership. Funds are typically provided by entities such as institutional investors, high net worth individuals, or financial institutions.
Typically, buyout transactions would fall under one of two major categories.
A management buyout (MBO) is when the company’s existing leadership decides to pool their resources in order to acquire a controlling interest in the firm’s ownership. This type of buyout is largely considered a preferred “exit strategy” for private businessmen who wish to retire or who want to divest themselves of certain products or services that they no longer consider part of their company’s core operations.
On the other hand, a leveraged buyout (LBO) occurs when the acquiring party puts up a small amount of capital and borrows a more significant amount of money in order to gain control of a target company, often using the assets of the firm under acquisition as collateral for the loans.
This is a high-risk, high-reward strategy that usually involves multiple layers of financing and whose returns are critically dependent on the target company’s future performance. In such cases, it is not unusual for the buyout firm to resell parts of the acquired firm to help pay off its debts.
Due diligence: Look before you leap
Because of the huge amounts of money involved, mostly culled from investment funds and financial institutions, the buyer cannot leave anything to chance. Following the caveat emptor principle, it is the acquiring party’s responsibility to conduct extensive due diligence on the target company it wishes to invest in and to make this a priority at the beginning of the entire buyout process.
Aside from doing business due diligence which focuses on the target company’s financial statements and forecasts, legal due diligence should also be conducted to review all legal issues affecting the business such as licenses and permits, real estate and intellectual property issues, applicable laws and regulations, employment contracts, and agreements with customers, clients, and shareholders.
Legal due diligence can also uncover any potential legal risks, such as pending or threatened litigation, and advise the acquiring party on possible remedies. Depending on the results of the due diligence process, you can review your purchase offer and negotiate more favorable terms.
Should the buyout push through, your legal counsel will also help structure a purchase agreement that protects your best interest and is aligned with your business goals.
With Veritas Global as your strategic partner, you are assured of a highly qualified and capable due diligence team that will make sure there are no unpleasant surprises after the deal is sealed.
As with any other financial transaction, a buyout should only occur if the acquiring party is assured that business and legal requirements are accomplished, potential risks are identified and mitigated, and the purchase is projected to yield favorable returns.
When the stakes are high, you can rely on Veritas Global for sensible and credible professional advise that will empower you to make informed decisions and get the most out your investment.