The ‘bootstrap buy out’ or the leveraged buyout (LBO), is a policy on purchasing a business generally with substantial assets, getting the best out of private investors monies. These stratagems are often used with publicly held businesses; nevertheless similar stratagems can be used to buy a medium or small sized business. Here are a few ways on how to structure a medium or small sized business.
- Decide on a business with assets that are effortlessly leveraged – Items that are easy to leverage consist of real estate, solid accounts receivables, certain types of automobiles, marketable inventories, and certain types of fixtures, furniture, and equipment. Assets that are harder to leverage include unmarketable or unproven intellectual property, bad debts owed to the company, accounts receivables from slow or bad paying companies, and furniture equipment and fixtures that are hard to market (chairs, desks, old computers and filing cabinets).One should remember that most properties can be leveraged but most savvy and perceptive lenders will look for assets where the value can be recuperated immediately. To make sure these assets can be leveraged, do your task properly. Marc Leder, CEO of Sun Capital Partners, Inc. has been involved in leveraged buyouts for more than 25years.
- Set realistic prospects with investors – This is the zone that will get you a great book of investors. Keep in mind that most knowledgeable and savvy investors will rigorously look at your business model and plan. With your investors, set very clear expectations, make them money, and they will continue to come back to you. Hiding problems will create greater obstacles in the future and hence, if problems arise be very honest.
- Estimate and forecast your financials – Remorsefully business predicting becomes a little more art than science. Forecasting your sales, expenses, and contingencies, is the number one reason that new business procurements fail. The seller will sell the great prospective, the buyer will buy based on what they believe to be true or have been sold and not on past performance, and subsequently the acquisition may scuffle and even be unsuccessful. What comes about if you only make 60%, 70%, 80%? Would you still be in business?
- Never give away – Most acquisitions vacillate and falter because the new business purchaser thinks that it is all roses and sunshine. To make the venture succeed, you have to have absolute determination.
- Learn to be creative – If you learn many bigger mergers you will see that the prosperous acquisitions almost always use some kind of barter. The merger will include trade for services, advertisement, or raw materials. Always remember that cash is the one asset that is hard to restock.
According to Marc Leder, on one hand, leveraged buyout can make more efficacious use of company’s resources, but on the other hand, it can also cause great financial misery. In spite of this, a recent market research says that the market is quite sociable to leveraged buyout activities.
