|Buy-Out Lexicon Contact Imprint Terms & Conditions|
A detailed and comprehensive analysis of a company prior to a business 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 a "careful check". Due diligence normally includes:
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 and tax consultants.
The sale of individual subsidiary companies or operating units from a group. The motivation for such a transaction is often the efforts of the management of the group to divest themselves of activities that are no longer part of their core business. For the management of smaller subsidiary companies that are often accorded only 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 purchasing Private Equity company, the former subsidiary represents a significant investment and not simply a peripheral activity.
Financing the purchase 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).
Purchase of Company A for a price of EUR 30 million. Sell-off after 5 years for EUR 50 million
Case A: Purchase using EUR 30 million equity capital -> no leverage
Profit on sale: EUR 20 million
Profit on sale for equity capital investors: EUR 20 million
Annual yield (IRR): 10.75%
Case B: Purchase company using EUR 15 million equity capital and EUR 15 million bank loan. Bank loan repaid within 5 years.
Profit on sale: EUR 20 million
Proceeds from sale for equity capital investors: EUR 35 million
Annual yield (IRR): 27.21%
As a rule, Private Equity investors expect that within the context of management buy-out and management buy-in arrangements, the management involved 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:
Management buy-in (MBI)
The takeover of a company by external managers. An interesting alternative where there are no suitable management personnel available within the company or the existing management has no interest in an MBO. Here, too, it is only possible in very rare cases to plan the financing without calling in an external financial partner (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 smooth the way for a succession solution. Only too frequently does the founder of a company find it difficult to contemplate selling off his life’s work to a domestic or foreign competitor with whom he has been competing for many years. Handing over his company to people with whom a trust-based relationship exists and with whose abilities he is familiar represents an attractive alternative.
For the management team, an MBO represents the opportunity to take the step up to independence, under conditions of limited risk. What is missing in most cases is the necessary capital. Only very few individuals employed as managers have the necessary financial resources available to put together a purchase price corresponding to the justified interests of the seller. Even having the "financial gap" plugged by banks is inconceivable, in most cases.
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 off at a price of EUR 30 million. The management joins forces with the holding company within a newly set up acquisition company (NewCo) in order to purchase the company.
After 5 years, the management, acting jointly with the holding company, sells off X-GmbH for EUR 40 million. Over these 5 years, it has been possible to reduce the bank loan to EUR 5 million. Accordingly, the following picture emerges for the parties involved:
In this example, management has been able to achieve an almost 6-fold increase in the capital invested.
The sale of a company with the former owner(s) reducing its/their participation. The objective may be to liquidate a part of the assets tied up in the company so as to arrive at 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 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.
The sale of a company by a financial investor (Exit) to another financial investor is known as a Secondary Buy-Out. 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.
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.
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 II). Additional equity capital can be provided through a private equity company.