legit
Sellers, take some time to determine whether a Buyer is a legitimate Buyer and not just dabbling in acquisitions. If Buyer is a publicly listed company, its financial statements are publicly available. Pay close attention to the balance sheet in particular. How much cash and how much debt does Buyer have? If the company has little or no cash and has a high debt load, Buyer may have a difficult time financing an acquisition. If Buyer is privately held, you can ask for the companyâs financials, though most privately held Buyers donât provide Sellers with financials. But what the heck? Asking never hurts.
If you canât get financials from Buyer, remember that the advent of the Internet has been a great leveler in finding information about companies. A routine online search may yield answers as to whether Buyer is legitimate or not. If Buyer is a privately held but large, well-known company that regularly does deals, itâs probably a legitimate Buyer. If Buyer is not well known, and doesnât share financials with you, determining Buyerâs legitimacy can be a trickier affair.
Tip: As Seller, donât agree to a financing contingency (an agreement that says Buyer who canât arrange financing can back out of the deal) with any Buyer, especially one whose financials/general standing you canât verify. Be skeptical of a Buyer who insists on a financing contingency, particularly if that Buyer purports itself to be a successful and financially flush company.
Understanding the Levels of Debt
Debt can help Buyer make an acquisition by leveraging Buyerâs existing capital. The following sections cover the different types of debt common in M&A, so dig in!
Surveying senior lenders and subordinated debt
A senior lender is usually a bank that lends a company money, often for the express purpose of financing an acquisition. As the name implies, this lender is senior to all other lenders, which means that the senior lender gets paid before the other lenders in the event the borrower goes bankrupt. A loan from a senior lender is called a senior loan.
Subordinated debt, often called sub debt, is a strip of capital similar to senior debt; however, the lender purposefully agrees to take a back seat to the senior lender. A lender willing to subordinate itself to the senior lender does so in exchange for a higher rate of return. Mezzanine debt (or simply mezz ) is a form of sub debt that usually has some sort of equity component (usually in the form of a warrant , which is the right to buy stock in the future at a low price).
Leverage
Simply put, leverage is debt â borrowed money â that helps Buyers make acquisitions. Instead of putting all of their money into play, leverage allows Buyers to spread their money further and make more acquisitions.
Say Buyer has $10 million to invest in acquisitions. Without leverage, he can make a single $10 million acquisition. However, if he borrows another $10 million, he can use the borrowed money to make more acquisitions. In this case, that same $10 million enables Buyer to make two $10 million acquisitions, so he now has $20 million of investments under management. Because he borrowed money to finance half the acquisition amount, heâs used 50 percent leverage. Back in the good old crazy days of the mid-2000s, some Buyers were able to put down just 10 percent, meaning that same $10 million could finance $100 million in acquisitions.
PE firms, in particular, like to utilize as much leverage as possible. The less equity a firm has to use, the higher the (potential) return on equity after the investment is sold.
Leverage gives you more bang for the buck as Buyer, but donât use debt excessively; the greater the debt load, the less likely a company will be able to withstand a downturn in the economy. That warning aside, and to paraphrase Alexander Hamilton, leverage, as long as it is not oppressive, will be a blessing to your
Sellers, take some time to determine whether a Buyer is a legitimate Buyer and not just dabbling in acquisitions. If Buyer is a publicly listed company, its financial statements are publicly available. Pay close attention to the balance sheet in particular. How much cash and how much debt does Buyer have? If the company has little or no cash and has a high debt load, Buyer may have a difficult time financing an acquisition. If Buyer is privately held, you can ask for the companyâs financials, though most privately held Buyers donât provide Sellers with financials. But what the heck? Asking never hurts.
If you canât get financials from Buyer, remember that the advent of the Internet has been a great leveler in finding information about companies. A routine online search may yield answers as to whether Buyer is legitimate or not. If Buyer is a privately held but large, well-known company that regularly does deals, itâs probably a legitimate Buyer. If Buyer is not well known, and doesnât share financials with you, determining Buyerâs legitimacy can be a trickier affair.
Tip: As Seller, donât agree to a financing contingency (an agreement that says Buyer who canât arrange financing can back out of the deal) with any Buyer, especially one whose financials/general standing you canât verify. Be skeptical of a Buyer who insists on a financing contingency, particularly if that Buyer purports itself to be a successful and financially flush company.
Understanding the Levels of Debt
Debt can help Buyer make an acquisition by leveraging Buyerâs existing capital. The following sections cover the different types of debt common in M&A, so dig in!
Surveying senior lenders and subordinated debt
A senior lender is usually a bank that lends a company money, often for the express purpose of financing an acquisition. As the name implies, this lender is senior to all other lenders, which means that the senior lender gets paid before the other lenders in the event the borrower goes bankrupt. A loan from a senior lender is called a senior loan.
Subordinated debt, often called sub debt, is a strip of capital similar to senior debt; however, the lender purposefully agrees to take a back seat to the senior lender. A lender willing to subordinate itself to the senior lender does so in exchange for a higher rate of return. Mezzanine debt (or simply mezz ) is a form of sub debt that usually has some sort of equity component (usually in the form of a warrant , which is the right to buy stock in the future at a low price).
Leverage
Simply put, leverage is debt â borrowed money â that helps Buyers make acquisitions. Instead of putting all of their money into play, leverage allows Buyers to spread their money further and make more acquisitions.
Say Buyer has $10 million to invest in acquisitions. Without leverage, he can make a single $10 million acquisition. However, if he borrows another $10 million, he can use the borrowed money to make more acquisitions. In this case, that same $10 million enables Buyer to make two $10 million acquisitions, so he now has $20 million of investments under management. Because he borrowed money to finance half the acquisition amount, heâs used 50 percent leverage. Back in the good old crazy days of the mid-2000s, some Buyers were able to put down just 10 percent, meaning that same $10 million could finance $100 million in acquisitions.
PE firms, in particular, like to utilize as much leverage as possible. The less equity a firm has to use, the higher the (potential) return on equity after the investment is sold.
Leverage gives you more bang for the buck as Buyer, but donât use debt excessively; the greater the debt load, the less likely a company will be able to withstand a downturn in the economy. That warning aside, and to paraphrase Alexander Hamilton, leverage, as long as it is not oppressive, will be a blessing to your
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