Leveraged Buyouts · Part 2 of 3 By Ryan M. Newburn | Adapted for INK Law
You stack capital from people who each get paid in a different order, and you make sure the business can pay all of them. That is the whole game between $500,000 and $20 million, which is where most owner-to-owner deals in America live. Ryan Newburn, corporate partner at INK™ and author of Leveraged Buyouts: Practice and Procedure, has closed leveraged acquisitions at every rung of that ladder. If you missed it, in part one covered why a $15,000 gym is an LBO too.
“Every covenant, guarantee, and intercreditor agreement reflects an underlying philosophy of control and trust.” § 4.02 Determination of Capital Stack.
Who puts up the money?
In a mid-sized LBO, the “capital stack” usually looks like this, from first paid to last paid:
- Senior lender. A bank or SBA-backed loan. First lien on everything. Cheapest money, strictest rules.
- Seller note. The seller finances part of their own sale. Sits behind the bank. Common, and often the difference between a deal closing and dying.
- Earnout. Part of the price paid later, only if the business hits targets. Fair in theory. A litigation magnet in practice.
- Buyer equity. The buyer’s own cash, or investors’ cash. Paid last. Biggest upside.
Each layer has a contract. Each contract decides what happens when a bad quarter shows up. That is where deals are won and lost, not at the closing dinner.
What does due diligence look like at this size?
More than a bank statement, less than a Wall Street data room. Three things matter:
- Quality of earnings. Is the cash flow real, recurring, and not dependent on the owner’s brother-in-law?
- Contracts that transfer. Leases, customer agreements, vendor terms. A “change of control” clause can void the very thing you’re buying.
- What isn’t on the balance sheet. Deferred maintenance, pending claims, tax exposure, an employee who is the business.
Where do deals actually die?
Not at the letter of intent. They die in the 60 days after it, when the seller note says “subordinated” but the bank’s lawyer says otherwise, or when the earnout defines “revenue” three different ways. Fix the definitions before you sign, and you rarely see the inside of a courtroom.
Part 3 goes to the top of the range, where the lenders bring their own lawyers.
Structuring a purchase or a sale? INK’s corporate law team builds the capital stack and the paper behind it. Talk to Ryan →
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Keywords: leveraged buyout structure · seller note subordination · earnout agreement attorney · business acquisition due diligence · corporate M&A lawyer
