How to acquire a company: LBO, MBO, MBI, BIMBO

Methods

LBO (Leveraged Buy-out)

It is a transaction in which a company is acquired from current shareholders by a new investor (A Fund, another Company, the workers, the Company’s Directors…). The purchase price is financed by debt. The debt is not always bank debt, there are other modalities. It can only be financed (Leverage) if the person who lends the money is confident in the capacity of the Company being acquired, in generating enough money for the payment of the debt. This is usually called “capacity to service the debt”.

LBO and Private Equity

Venture Capital Funds and Management Companies usually use this system of leveraged acquisition (with debt). Why does Venture Capital normally use this scheme?

1. a) the indebtedness allows them, with a reduced investment and a lot of debt, to acquire Companies of considerable size; b) it increases the profitability of their investments since with few equity (and a lot of debt) they opt for the possible benefits of the sum of capital plus debt; c) the financing entities of the acquisition (with debt) guarantee the collection of the debt with the assets of the acquired company (this is the most delicate part); d) the confusion of assets allows the payment of the debt to be made by the acquired company itself, and not by the acquiring Company. In this way, it does not assume the fiscal cost of the dividend distributions for the bonus it would have needed to meet the transaction debt; and, finally, e) the company that is the object of the purchase and sale bears the financial cost, reducing the fiscal cost, by deducting as a cost the interest paid on the loans and the amortization of the goodwill that is revealed with the merger.

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The decision to buy or sell a company is crucial in the business sector. A good purchase (paying a reasonable price at the right time) will have satisfactory repercussions on the future of a firm. However, an acquisition made at the wrong time, or at an excessive price, can lead to corporate bankruptcy.

LBO and Financial Assistance

The main legal risk of LBO structures is Financial Assistance. In this sense we recommend this article, where it is explained in more detail. Financial Assistance

The described operation in principle corresponds to what in the commercial context would be called “Leveraged buy-out” (LBO).

In relation to this question there are already two Supreme Court rulings: the STS of 12 November 2012, and the STS of 25 April 2013. Both resolutions consider that it is:

“a transaction in which an existing or newly formed company “vehicle company” or “newco” indebts itself to acquire control of another company by making a “leverage buy out” (LBO). Subsequently, the acquirer absorbs a “target company”, also called “target”, giving rise to an integration (1) “forward leveraged buy-out” or (2) is absorbed by it, giving rise to the reverse leveraged buy-out. The financial cost of the acquisition ends up falling in any case on the assets of the acquired company”.

LBO: The Supreme Court agrees that there is NO Financial Assistance

“Both STSs raised the uncertainty of whether they could be understood as prohibited by the prohibition of financial assistance for the purchase of own shares or those issued by a company of the group. However, the Second Council Directive 77/91/EEC of 13 December 1976, in conjunction with Directive 2006/68/EC of the European Parliament and of the Council of 6 September 2006, opted for the need to eliminate these prohibitions and replace them with guarantees to protect shareholders and third parties. In line with this, in our legal system, Law 3/2009, of 3 April, on structural modifications of commercial companies, regulates the possibility of this type of merger with the due guarantees in its article 35”.

Conclusion on possible Financial Assistance in LBOs:

There is no financial assistance, as long as appropriate guarantees are taken

MBO (Managed Buy-Out)

The MBO (Management Buy-out) is another way of acquiring companies. It is, in short, a transaction in which the Managers (Management Team) of the company, bets on buying it from the current partners. If necessary, the financing will come from external entities, via loans, bonds, or other financing modalities.

MBI (Management Buy In)

The third modality we describe is the MBI. In reality, it is a type of LBO where the buyers are expert managers in the sector. And because of their experience they decide to invest their own financial resources. The size of the transaction is often much larger than the financial capacity of the managers. The remaining funds come from external capital providers in the form of shareholder participation and in the form of external debt (typically leveraged loans). This again is based on the assets and assessment of the target company’s ability to generate the cash flow needed to repay the debt.

However, an MBI does not always originate from the managers themselves. Often this process is driven by the Company itself. The process can also be initiated by the company itself. When? When the Company has no succession. Also, when the founder has no heirs who want to continue with the business project. On other occasions, it is a consequence of the need for a change in the management model of the company or when the company needs to grow for strategic reasons. Who manages this MBI process? Banks, financial institutions, Corporate Finance advisors, Private Equity Funds and Managers, Venture Capital…

BIMBO (Buy-In_Managament-Buy-Out)

Buy-In-Management-Buy-Out (BIMBO) is a combination of an MBI (external managers) and an MBO (Directors and Managers already in the Company). The model follows the following scheme: The external managers acquire the business, but do not dispense with the Directors who were already in the Company. Through a BIMBO it is possible to continue with the pre-existing Directors (MBO-manager), channeling the transition with an external Director who is an expert in integrations (MBI-manager), and who has experience in integrations. A BIMBO aims to combine the advantages of an MBI and an MBO. Statistics show that MBI processes often fail more than MBOs. This is why BIMBOs are becoming more and more common.

How to acquire a company: LBO, MBO, MBI, BIMBO: Keys

1. Design of the Business Plan, financial and operational forecasts
2. Define the scope and perimeter of the transaction: what is outside and what is the real object of the transaction.
3. Understand the context in which current Directors work: conflicts, inefficiencies, dormant assets…
4. Design of the transaction. The ideal scheme must be drawn up depending on each company
5. Due Diligence: Legal, financial, business, tax, labor, environmental …
6. Company Valuation
7. Transaction tax structure
8. Financing of the transaction, the purchasers’ own financing and/or third-party financing Banks, Bonds or other debt mechanisms
9. Schedule: Deadlines are always missed and exceeded… by far. But they have to be set. Patience
10. Professionals: Experience is critical in these processes and in each of the 9 preceding keys. You will need financial advisors, legal advisors, and both will coordinate the need (eventually) for others. Can a transaction take place without advisors? Of course it can, but it is unlikely to succeed.

If this article has been of interest, we also suggest you to read the following article published on our website:

The 10 Key Steps of Mergers and Acquisitions in How to Sell a Company