What is a leveraged acquisition?

Answer 1

using a company's assets to pay for the debt of purchasing the company How to Achieve Acquisition Financing: Creative Ways to Build Shareholder Value When considering an acquisition (and alternatives for acquisition financing) there are always three key items of consideration. In order of importance they are 1) the continued growth opportunity provided by the acquisition, 2) the acquisition financing terms and 3) the purchase price. Many acquisitions that fail often do so because those priorities are not in line. The most common mistake is rationalizing an acquisition because of an attractive purchase price, rather than its strategic importance to the buyer's existing business and future growth plans. Listed below are a few important pointers, for acquiring, financing and executing acquisitions that can build significant value for the buyer's shareholders. Identify the continued growth opportunities - Acquisitions always provide immediate growth as the two companies are combined. The better question is once combined will they provide continued growth? Good acquisitions always provide some opportunity for continued growth. That growth may come from better serving a buyer's existing customers, ease of expanding into new markets, or even as the preliminary step towards continued acquisitions of similar type businesses over a period of time. Attractive acquisitions always have a clear opportunity for follow-on growth because they are strategic to a buyer's current business. Conversely, most acquisitions that don't ultimately create additional value, almost always have trouble answering the question of how the acquisition will provide continued growth after being purchased. Realize acquisition financing terms are more important than the purchase price - Not unlike buying a car, the true cost buying a company is comprised of many components. In financial terms it's both the cost of the business and the cost of the acquisition financing. Most buyers have far more to gain by the spread in acquisition financing terms than the spread in the purchase price. To illustrate, assume a buyer has two alternatives for financing an acquisition 1) to finance the acquisition by selling 25% of the buyer's stock or 2) paying 10% more for the acquisition but financing the acquisition entirely with debt. Most buyers would pick option 2. Why? Because over time, the 100% debt deal will create more value for the existing shareholders as the debt is paid down. Financing that dilutes a buyer's ownership position by 25% immediately raises the effective purchase price of business by the same amount or more. As such, acquisition financing terms can swing substantially from one institution to another. It's not uncommon for the total cost of acquisition financing to vary by more than 50%. Do acquisition prices swing that much? No. Do acquisition financing terms? Absolutely. Seek a cooperative seller - To allow enough time to get the best possible financing terms, it can take 120-180 days to close on both the financing and the acquisition. As a result, a buyer needs a cooperative seller. How do you get a cooperative seller? · Make every effort to give the seller their target purchase price - Most sellers have a price in mind and with a little analysis you can quickly determine whether their price is reasonable. If you are convinced the target business will add value to your business and can be financed, make the seller happy and motivated by offering them their target purchase price. · Give the seller quick feedback - Make your initial offer simple, and attractive. Give the seller as much cash upfront as possible. Avoid overly creative' strategies that make the seller think they are financing their own acquisition. Follow-up the verbal offer with a formal Letter of Intent. Once you have a signed Letter of Intent, you have a committed seller. · Make the process easy for the seller - Try to minimize the seller's time, effort and expense. This will keep the seller energized and motivated throughout the transaction. Share your key milestones with the seller, particularly as you secure financing for the transaction. Having a motivated, cooperative seller is essential to secure financing at attractive terms. Create a Comprehensive Business and Financial Plan - To get the best possible financing terms and improve the likelihood of success, create a business plan that details the areas of strategic, business, and financial synergies as well as a detailed picture of the future projections of the combined business. Many acquisitions fail to perform because the detailed planning was never done. Solicit multiple financing sources - With a strong business plan in hand, the company is in an ideal position to seek financing customized to their needs. Most important is a well developed plan allows buyers to get financing based on the combined businesses not just the buyer's current business. A business plan illustrating the combined operations provides more collateral, more cash flow and greater certainty and usually substantially better acquisition financing terms. But, customized acquisition financing can only be found if you provide the detailed information necessary for financial institutions to understand it. Financing terms often vary significantly from one institution to another and substantially impact the total cost of the financing (and possible ownership dilution). Also, the financial covenants and risks can also vary substantially from one group to another. As an example, some institutions may require personal guarantees or stock ownership (or warrants) while others do not. Copy the financial partner's homework - It's always important to do due diligence on any acquisition target. Most companies can perform adequate due diligence on a company's operations using a checklist, common sense, and a little effort. Thankfully, your financing partner will also perform their own due diligence, particularly on the financial aspects of their business. The benefit of using their work is not only less work and expense for the Company but should they find any problems, both the company and the financing partner can go back to the seller to address the problem. Sellers are usually much more responsive to questions and changes coming from the financing group that also has the checkbook to write the seller's check. Admittedly, some of the strategies outlined above may seem to fly in the face of conventional wisdom, but they do provide the key ingredients to a successful transaction and build value for the most important stakeholder's in any transaction, the buyer's existing shareholders.

Answer 2

A leveraged acquisition refers to an acquisition where a significant portion of the purchase price is financed through debt. This strategy allows the acquiring company to use the target company's assets and cash flows as collateral for the borrowed funds. It is a common technique used to maximize returns for the acquiring company's shareholders.