You run IHeartCholesterol, a 100-store pizza chain. You have no debt and small cash amounts. You have used extra cash historically to buy or open additional pizza parlors.
But now along comes MetabolismKillers, a chain of 40 pizza parlors. They want 20 million bucks for you to buy all of them, and the parlors themselves currently produce each year about a million bucks in cash. You think that, with your buying leverage of cheese and dough and oven rentals, you could make the acquisition produce cash flow of a million-and-a-half bucks in Year One just by virtue of lowering expenses on volume purchases of the stuff you put on the pizzas.
Minor problem: You don't have 20 million bucks laying around. Your own existing business has cash flow of about $3 million a year. Combined, you'd have $4.5 million a year in cash flow, and that should be enough to quickly pay off the Acquisition Financing of $20 million you want to raise from your kindly loving bankers, who are all too happy to loan you the money at onerous terms.
If things go well, you grow great; if they don't, the financiers likely take ownership of your pizza chain and all your hard work is wizzed away, like the soda you drank three hours ago.
Related or Semi-related Video
Finance: What is MBO v LBO?17 Views
Finance allah shmoop What is an m b o versus
and lbo Okay let's Get their letters right first And
n b o is a management buyout Ngos on their
own aren't all that common But in a given company
inside management might own same thirty percent of the stock
They might partner with another investor who owns a twenty
percent or more And then they might borrow say fifty
percent in debt and take the company private fixit pivot
tweak live with bad quarters for a while without wall
street yelling at him And then they might sell the
company cell or whatever Maybe take it public again will
The distinctive feature here is that the company is already
in place Management is doing the deal and more often
than not essentially all the net worth of the management
will be in the company leveraged when the embryo is
completed And that level of financial commitment really keeps the
team focused Because if things don't work out when they
lose everything your house their car in there Slinky collection
All right next up we have an lbo which is
a leveraged buyout and it just refers to the practice
Of taking on debt to buy a company sometimes with
same management sometimes with different players like an lbo is
a bigger venn diagram set than the embryo thing Well
in an lbo the same basic thing happens But in
a whole bunch of cases management is tossed out The
company wouldn't be quote vulnerable unquote to an lbo Had
management done a good job and kept the company trading
or valued at a high multiple where it would then
be almost impossible to make the risk reward scenario workout
in taking out a whole lot of debt to get
company bought and then turned in the right direction Instead
new management in lbo is usually brought in and resembling
moses noah and other biblical characters and their perceived greatness
and there's a stone tablet with a new set of
commandments Thou shalt be profitable or something like that Arguments
are had at the board level and eventually either the
lbo works and the company has taken public again or
sold for a big price Or it isn't and wrath 00:02:06.63 --> [endTime] has had
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