Leveraged Buyouts · Part 1 of 3 By Ryan M. Newburn | Adapted for INK Law
Yes. A leveraged buyout is simply buying a business with mostly borrowed money and letting the business pay off the loan. It is not a Wall Street trick. Ryan Newburn, corporate partner at INK™ and author of Leveraged Buyouts: Practice and Procedure (LexisNexis), has executed them in 22 countries. INK handles buyouts from $15,000 to $150 million. In March, we previewed the book before it was out. Now that it is, this three-part series takes the theory to the street: the corner gym and the $150 million manufacturer run on the same engine.
What actually happens in an LBO?
Three moves.
- A buyer puts in a slice of their own money.
- A lender (a bank, the SBA, or the seller) puts in the rest.
- The business being bought becomes the collateral, and its cash flow makes the payments.
If the cash flow covers the debt with room to spare, the buyer just acquired a company for a fraction of its price. If it doesn’t, the lender owns the business.
Why does this work for a $15,000 gym?
Because small businesses are priced on cash flow, not hype. A neighborhood gym netting $60,000 a year might sell for two to three times that. The seller often carries part of the note themselves. An SBA-backed loan covers more. The buyer’s cash is the smallest number on the page.
That is a leveraged buyout. Nobody calls it one, which is exactly why buyers get hurt: they sign a purchase agreement, a seller note, a personal guarantee, and a lease assignment without realizing they’ve stacked four layers of leverage on a business they’ve owned for zero days.
“Leverage magnifies everything it touches—profit, risk, ambition, and consequence.” § 1.06 Risks and Challenges.
What goes wrong?
The deal is rarely the problem. The paper is. No working-capital cushion. A seller note with no subordination language. Personal guarantees that outlive the business. Due diligence that consisted of looking at a bank statement. (We covered the bigger version of this list in The Top 5 Things to Watch Out for in a Merger or Acquisition.)
Leverage is a tool, not a philosophy. At $15,000 or $150 million, the discipline is identical: know what the cash flow really is, know who gets paid first when it drops, and put it in writing before you wire anything.
Part 2 covers what changes when the number has six or seven zeros.
Buying a business, or selling one? INK’s corporate law and business law teams structure leveraged acquisitions at every size. Talk to Ryan →
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Keywords: leveraged buyout attorney · small business acquisition lawyer · buying a business with SBA loan · seller financing agreement · M&A counsel
