Leveraged Buyouts: Why They Could Be Your Best Acquisition or Exit Strategy

• Can I handle this much leverage?
• Am I overpaying for this asset?
• What are my first steps?

• Is this the right time to sell?
• Why choose an LBO over a cash offer?
• What can I expect from the process?

Vantage Bank San Antonio Market President, Curt Kruse, shared what you can expect from our LBO process.

"The first thing we do in a leveraged buyout is acquire a thorough understanding of the companies involved. We visit the site, learn their story, and dive deep into the financials," said Kruse. "Then we're able to answer questions and apply our skill in designing the best deal architecture. We might determine this isn't the right time to sell, or maybe, we don’t think it’s a good investment for the buyer. We’ll be the first to point that out because we always want our client to succeed."

After our analysis, we bring in a reputable 3rd party to evaluate the company, much like an appraisal in real estate. Using indicators like cash flow and hard assets like equipment and land, we can tell if this will be a good investment for all parties. Then we move on to the term sheet and negotiation.

You should understand that not all banks offer LBOs because the value of a borrower's collateral is typically much lower than the leverage they’re taking on. However, we provide LBOs because the expertise we've developed makes us confident in the success of the deals we structure.

Our experience also allows us to streamline the process – often providing a term sheet within days after our research. Keep in mind that we hold ourselves to the highest degree of confidentiality and discretion when researching a company’s proprietary information and financials.

You should be aware of high interest rates when considering an LBO.

"Capital and debt markets have seen a dramatic decline in mergers and acquisitions and LBOs most recently due to increased rate pressure. However, it's possible that the Fed's rate hikes could also spur buying opportunities by creating a potential value-added market for private equity," explained Kruse.

Despite rising rates, an LBO can still be the right move. Kruse explains why.

"The less equity you put down, the greater your rate of return is as a multiple. So it could be beneficial to negotiate more leverage. If you're able to put down more equity to reduce the impact of high interest, that’s great, too. We’ve managed deals with a ratio of 90% debt to 10% equity, and deals with a 50/50 split."

From the seller’s perspective, LBOs can result in a higher return than a cash offer for your business. This is because financing allows the buyer to close the gap between how much they have to invest and the market price of your business.

Of course, the best decision varies depending on your situation. In any economic situation, you want to move forward with confidence, and that’s where Kruse steps in.

"We don't just provide a term sheet and say we hope this works for you. We also provide models that show why we think this LBO will work for you," said Kruse. "Seeing the cash flow table and your historical earnings compared to the debt you’re taking on makes you feel better about the overall deal."

Here are three unique qualities and advantages we provide as your LBO banking partner:

1. The expertise and transparency to recommend the best course of action, even if it's not the answer you originally envisioned.
   
   • We sit down as your partner, give advice based on the facts, and structure a deal the right way for both buyer and seller. That includes not doing deals that don't make sense.
2. The foresight to anticipate the deal's future impact and act in your best interests and that of your people
   • We ask ourselves, "If we were the owners in this deal, how would we take care of our employees and key personnel?"
3. Private equity experience that lends itself to understanding all sides of the capital stack and how to properly structure the LBO.
   • We understand how businesses become private equity leaders and how family offices make money because our people have been there.

For Vantage Bank, that private equity experience comes from Chief Credit Officer, Randy Talley.

"An LBO can be effective for growing and adding value to companies. It can also be a successful estate planning tool or exit strategy that unlocks retirement wealth built in the company, while keeping the company in the family for the next generation’s success. Either way, success starts with operational transparency, a creative leverage structure, and a strong understanding of ownership’s future goals," said Talley.