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Leveraged Buyouts - GermanyAbout this Practice Area
Leveraged Buyouts Definition
A Leveraged Buyout (LBO) is the acquisition of a company with equity and predominantly borrowed money.
The acquiring company hereby makes use of the leverage effect: Subject to a positive development of the acquired company and its business, the returns increase together with an increasing amount of borrowed money, as debt has usually a lower cost of capital than equity.
By using different forms of capital (senior debt, mezzanine financing, high yield bonds, convertible bonds, etc.), a high level of flexibility is reached granting an acquisition tailored to the borrower's needs. The investor's risk is limited to the invested capital as LBO financings are usually structured as non-recourse financings.
The cash flow of the target is used for repayment and interest payments which can bare the danger of "over-leverage", meaning that the target cannot generate sufficient cash flows so that it will face insolvency or restructuring measures need to be discussed.
There are different types of LBOs such as the usual Investor LBO or a management buyout (MBO) or management buy-in (MBI), where the established management team (MBO) or an external management (MBI) acquires a substantial portion of the shares in the company.
Legal services provided by lawyers who practice in the field of acquisition and leveraged finance include legal advice in respect of the financing structure, the preparation and negotiation of the finance documents including security documents and transaction management, i.e. coordination of local counsel in all relevant jurisdictions, collecting conditions precedent, etc.
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