Leveraged Buyout: the winning strategy to acquire companies with limited capital

A Leveraged Buyout (LBO) involves acquiring a company primarily using debt financing.
This debt will subsequently be repaid using future profits, or through the sale of part of the acquired company's assets.

• Identifying the target company: a company with suitable characteristics is selected (stable cash flows, low debt, tangible assets, etc.)
• Creation of a newco: the buyer establishes a company that will be used as a vehicle for the acquisition.
• Financing request: the newco obtains the necessary financing by combining bank loans, bond loans, investors' equity capital, etc.
• Acquisition and merger: the newco acquires the target company's shares before being incorporated through a reverse merger (the target incorporates the newco)
• Debt management: the acquired company's cash flows are used to repay the debt contracted for the acquisition operation

• ROE amplification: the invested equity capital, thanks to leverage, generates significantly higher returns compared to traditional acquisitions.
• Lower financial exposure: the investor limits their direct investment, reducing the risk of using their own resources.
• Financial discipline: the need to repay debt imposes rigid and efficiency-oriented management.
• Tax incentives: deductible debt interest within legal constraints reduces the overall tax burden of the operation.

• More efficient management: the investor is strongly motivated to improve operational efficiency to generate cash flows needed to repay the debt.
• Strategic restructuring: The operation is accompanied by a review of the business model and a renewal of corporate strategy.
• Access to new expertise: the investor typically brings advanced managerial and financial expertise.
• Valorization of underutilized assets: The operation enhances assets that might be undervalued or underutilized.

In addition to the advantages mentioned above, a leveraged buyout operation also presents the following risk profiles that must be carefully considered:

• High debt level: high debt can put pressure on the company during economic downturns.
• Interest rate sensitivity: a significant increase in rates without adequate hedging can compromise the sustainability of the financial model.
• Cash flow pressure: the need to generate liquidity for debt service can limit development investments.
• Structural complexity: these operations require specialized expertise and careful planning.

Leveraged Buyout proves particularly suitable in various scenarios:

• Generational transition: when family business owners want to transfer control but can't find interested heirs.
• Management buyout: when company managers want to acquire ownership but lack sufficient capital.
• Acquisition of business divisions: when large groups decide to divest non-strategic business units.
• Privatization of listed companies: when it's believed that a company's value can be better expressed outside the stock market.
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Leveraged buyout (LBO) operations in Italy were initially viewed with suspicion due to potential conflict with the prohibition of financial assistance (art. 2358 c.c.).

Thanks to corporate law reform and the introduction of "merger following acquisition with debt" regulations, the legal framework is now clearer.

Leveraged Buyout (LBO) operations continue to require careful tax planning in any case.

It's important to consider aspects such as interest deductibility, indirect taxes on extraordinary operations, and the possibility of using previous tax losses.

→ In conclusion, Leveraged Buyout (LBO) represents a sophisticated financial instrument that, when used appropriately, can create significant value for all parties involved.

However, its complexity requires specialized consultation to evaluate its suitability for the specific case and to structure the operation optimally.

Studio Mannelli & Partners offers Specialized Advisory services for M&A operations, supporting Entrepreneurs and Investors in successfully facing current market challenges.

Contact us for personalized consultation on your project for acquiring or selling companies or corporate shareholdings.