Chapter 4

Structuring the Buyout

Structuring the Buyout

Covered in this Module

The Buyout Model

The Acquisition Price

The Financing Structure

  • The Debt Element
  • The Equity Element

The Management Stake

Legal Documents

This Module reviews the way in which equity and debt finance are combined to provide the finance for a Buyout. The essential characteristics of a Buyout, in terms of financial structuring, are:

  • the use of the target company’s cash generation capacity to service debt; and
  • the use of debt to leverage the returns delivered from value enhancement to the equity investors and management.

The Module first introduces the Buyout model, how it is driven by the target company’s forecast financial performance and how this guides both the levels of debt that can be supported and the price that can be paid for the company. We then review the various categories of debt used in Buyouts and their application, before outlining the Buyout fund’s approach to structuring the equity element and addressing the essential topic of the management team’s equity participation.

The key non-financial elements of the legal contracts with the investor are reviewed later in this Module although here we do not cover other documentation such as the Sale and Purchase Agreement or the Debt Agreements.