Buy-Out Lexicon

Due diligence
A detailed and comprehensive analysis of a company prior to an acquisition, stock market launch or the issue of credit in order to identify inherent opportunities and risks within the company at an early stage. The German equivalent would translate literally as "careful check". Due diligence normally includes audits of the following areas:

  • commercial due diligence
  • tax due diligence
  • market and strategic due diligence
  • legal due diligence
  • technological due diligence
  • environmental due diligence
  • insurance due diligence

As a rule, the due diligence process is carried out with the assistance of professional and, above all, neutral third parties such as lawyers, auditors, engineers and tax consultants.

The sale of an individual subsidiary company or operating unit from a group. The motivation for such a transaction is often the divestment of activities that are no longer part of their core business. For the management of smaller subsidiary companies that are often accorded comparatively little attention and meagre financial resources within the overall group, a spin-off can represent the opportunity to put their own ideas into practice. For the acquiring Private Equity company, the former subsidiary represents a significant investment and not simply a peripheral activity.

Leveraged buy-out
Financing of the acquisition of a company with the partial assistance of third-party capital (bank loans). Objective: to increase the yield from the equity capital invested (the so-called leverage effect).

Acquisition of company A for a price of € 30 million. Sale of the investment after 5 years for € 50 million

Case A: Acquisition using € 30 million equity capital -> no leverage

Profit on sale: € 20 million
Profit on sale for equity capital investors: € 20 million
Annual yield (IRR): 11%

Case B: Acquisition company using € 15 million equity capital and € 15 million bank loan. Bank loan repaid within 5 years.

Profit on sale: € 20 million
Proceeds from sale for equity capital investors: € 35 million
Annual yield (IRR): 21%

Manager participation
As a rule, Private Equity investors expect that within the context of management buy-out and management buy-in transactions, the management will participate in the transaction with their own financial resources by contributing to the purchase price. The Private Equity investor aims to create a balance of interests with the management team by enabling management to participate both in the risk and the profits associated with the transaction. Finatem expects participating managers to invest in this way. In return, we offer attractive participation models individually tailored to the position of the relevant manager, such as:

  • partial or complete financing of the participation in advance by Finatem
  • conversion of profit-dependent remuneration components (bonuses and premiums) into shares in the company
  • participation in the equity capital with preferential conditions
  • greater than proportional participation in sales proceeds

Management buy-in (MBI)
The takeover of a company by external managers. An interesting alternative where there is no suitable management personnel available within the company or the existing management has no interest in an MBO. Without a financial partner, MBI's are rarely conducted (see below: MBO).

Management buy-out (MBO)
The purchase of a company by its own management. This form of corporate transaction is frequently preferred in order to ease the way for a succession solution. All too often, selling a life's work to a domestic or foreign competitor is difficult for the founder of a company. An attractive alternative is handing over the company to persons with known abilities and to whom a trust-based relationship already exists.

For the management team, an MBO represents the opportunity to become independent with limited risk exposure. What is required in most cases is the capital. Only very few individuals employed as managers have the necessary financial resources available to finance a purchase price corresponding to needs of the seller.

Past experience has shown that joining forces with a Private Equity company is the optimum solution for all parties involved. Holding companies have the financial resources and the experience in the structuring and execution of management buy-outs. This further reduces the risk of failure for the management team. Indeed, the vast majority of MBOs turn out to be a success for the management involved.

X-GmbH, a limited liability company, is to be sold at a price of € 30 million. The management joins forces with the holding company within a newly set up acquisition company (NewCo) in order to purchase the company.

Financing structure:
Equity capital – management   € 1,0 M (20%)
Equity capital - financial investor   € 4,0 M (80%)
Company loan - financial investor € 10,0 M
Bank loan € 15,0 M
Total € 30,0 M

After 5 years, the management, acting jointly with the holding company, sells X-GmbH for € 40 million. Over these 5 years, it has been possible to reduce the bank loan to € 5 million. Accordingly, the following picture emerges for the parties involved:

Sale proceeds after deduction of bank loans € 35,0 M
Repayment of shareholder loan, incl. interest € 12,0 M
Sale proceeds allocated to equity capital € 23,0 M
- of which management   € 4,6 M
- of which financial investor € 18,4 M

In this example, management has been able to achieve an almost 5-fold increase in the capital invested.

Owner's buy-out
The sale of a company with the former owner(s) reducing its/their participation. The objective may be to liquidate part of the assets tied up in the company so as to arrive at an improved diversification of the owner’s personal assets without completely giving up his/their status as company member(s).

In many cases, an owner’s buy-out represents the first step in the implementation of a succession solution. In an initial step, for example, the company is sold off to an acquisition company with the participation of the former owners, management and a holding company. In this way the former owner achieves both diversification of his assets and also makes it possible for his company to make a "gentle" transition.

Secondary buy-out
The sale of a company by a financial investor (Exit) to another financial investor. The motive for the acquiring investment company may be an additional purchase for an existing investment (buy-and-build) or a further injection of growth capital to take the company to the next stage of development.

Trade Sale
Generally speaking, a Trade Sale refers to the sale of a company to a competitor in the broadest sense of the word. This means that a Trade Sale is distinguished in particular from a Secondary Buy-Out where a financial investor (investment company/private equity company) sells one of its investments on to another financial investor.

In a Trade Sale the acquiring company may, for example, be motivated by a strategy of vertical or horizontal expansion, or by a desire to open up new markets and target new customer groups.

Financing growth
Increasing the equity capital of a company so as to finance further growth. Small to medium-sized companies in Germany are characterised by a relatively low ratio of equity capital, compared to the international norm. Financing for growth (such as expansion into foreign markets or market penetration with new, innovative products) may not be available due to a restrictive policy on the issue of credit (viz. Basel III). Additional equity capital can be provided through a private equity company.