Leveraged acquisition finance allows companies and investors to fund business purchases through a mix of bank loans and investor debt. It is a common route for management buyouts, buy-ins and third-party acquisitions, and plays a key role in private equity-backed transactions.
In this guide, we explain the key structures, financing options and legal terms involved in leveraged buyouts in the UK. Whether you are raising senior debt, issuing bonds or preparing an equity commitment, you will find practical insights on how deals are structured and what lenders and investors expect.
Planning a buyout or exploring leveraged finance? Our finance solicitors can guide you through the process and work closely with your tax and corporate teams to support a smooth and successful transaction.
Jump to:
- Who might use leveraged acquisition finance?
- What is a management buy-out (MBO)?
- What is a management buy-in (MBI)?
- What is a buy-in management buyout (BIMBO)?
- How is a buyout structured?
- How is a buyout financed?
- What makes up buy-out equity finance?
- What makes up buy-out debt finance?
- The senior debt package
- What is an equity commitment letter?
- What is a certain funds-compliant basis?
Who might use leveraged acquisition finance?
Leveraged acquisition finance may be provided to:
- An existing internal management team (a management buy-out)
- An external management team (a management buy-in)
- A third party (an acquisition)
What is a management buy-out (MBO)?
A management buy-out is where an existing management team takes ownership of a company using equity finance from a private equity provider and/or debt finance from financial institutions.
MBOs are conducted by management teams that want to get the financial rewards for the development of a company more directly than as employees.
In effect, MBOs turn the management of a company into its shareholders.
Read our guide to learn what’s involved in a MBO, including the key steps, benefits, risks, and when this route is suitable for business owners and management teams.
What is a management buy-in (MBI)?
A management buy-in is where a management group from outside the company leads the acquisition.
An MBI may occur if outside management feel that the company is undervalued or not being properly managed.
What is a buy-in management buyout (BIMBO)?
A BIMBO is where both incoming and existing management are involved in the purchase of the company.
Understand the differences between MBIs, BIMBOS and traditional MBOs, along with the advantages and challenges of each in our article.
How is a buyout structured?
Buyouts are typically structured using two companies:
- A top company (a new company), which acts as the investment vehicle
- A wholly-owned subsidiary of the new company, which will act as the purchaser
In a simple MBO, a single special purpose vehicle (SPV) may act as both the purchasing and investment vehicle. For more complex deals, with multiple layers of debt financing, new subsidiary companies will be inserted into the corporate structure to subordinate junior debt to senior debt.
How is a buyout financed?
Buyouts are normally financed through a combination of equity and debt.
Equity will be provided by private equity investors and management (together ‘the investors’). The investors provide funds in return for shares in the new company ('Newco'). These shares entitle them to a share of the company's profits.
Debt finance will be raised from financial institutions and other investors. The complexity of the debt finance may vary considerably.
If you already decided that a MBO is the right route for you, and you're wondering how to finance a MBO, explore the funding options available in our article, including how to structure MBO finance and what investors and lenders typically look for.
What makes up buy-out equity finance?
Buy-out equity is normally a combination of ordinary share capital and redeemable preference shares in the new company. Redeemable preference shares are shares that entitle the shareholder to receive dividends ahead of ordinary shareholders but may be bought back (redeemed) by the company. Typically, they entitle a shareholder to receive a fixed income but with limited voting rights. The redeemable preference shares will rank behind the debt finance.
What makes up buy-out debt finance?
Debt finance is normally comprised of senior and junior debt. Senior debt is the main source of finance and ranks in priority to junior debt. Senior debt is most frequently provided by banks but pension funds, insurance undertakings and hedge funds may also contribute to the senior debt package.
Junior debt is a secondary source of finance in a buyout. It ranks after senior debt for repayments and insolvency. Junior debt may take the form of mezzanine debt, high yield debt, payment-in-kind (PIK) debt or second lien finance.
The senior debt package
The senior debt will form the bulk of the financing and may be provided by one or more banks. The senior debt package normally consists of the acquisition finance and working capital for the company.
The acquisition finance covers the cost of acquiring ownership of the company while working capital finance provides the operational funds needed by a company. In larger transactions, the loan may be divided into tranches to which different commercial terms will apply.
A senior facilities agreement will specify the period during which funds are available and the requirements on management to draw down the funds.
What is an equity commitment letter?
An equity commitment letter is a guarantee that a Private Equity fund will subscribe for shares in the new company. An equity commitment letter gives a seller comfort that the buying company will have sufficient (equity) funds to complete the acquisition.
If the transaction involves a substantial amount of debt, then a seller may also wish to establish that the debt funds are provided on a certain funds-compliant basis.
What is a certain funds-compliant basis?
The concept of ‘certain funds’ comes from public takeovers. Under Rule 2.7(d) of the City Code on Takeovers and Mergers, a cash bid for a company must be accompanied by a confirmation from a financial adviser that the bidder has sufficient resources to complete the acquisition.
In a private acquisition, the seller will seek confirmation from the debt providers that they will only refuse to lend Newco the money to complete the acquisition in very limited circumstances. This provides the seller with comfort that Newco will be able to complete the acquisition.
This confirmation may take the form of a debt commitment letter, where the debt provider commits to provide debt financing at the close of the transaction, subject to certain conditions. The debt commitment letter may include confirmation that the debt facility has been approved by the debt provider’s investment committee.
