What is leveraged acquisition finance?

Last updated: 6 September 2021

Estimated reading time: 4 minutes

Member View

Leveraged acquisition finance is the provision of bank loans and/or the issue of high yield bonds to fund the acquisition of a company (or parts of a company). Here we’ll be covering the fundamentals of leveraged acquisition finance in the UK with these FAQs. 

Jump to:

  1. Who might use leveraged acquisition finance?
  2. What is a management buy-out (MBO)?
  3. What is a management buy-in (MBI)?
  4. What is a buy-in management buyout (BIMBO)?
  5. How is a buyout structured?
  6. How is a buyout financed?
  7. What makes up buy-out equity finance?
  8. What makes up buy-out debt finance?
  9. The senior debt package
  10. What is an equity commitment letter?
  11. What is a certain funds-compliant basis?
  12. Why use our commercial finance solicitors?

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)?

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

What is a management buy-in (MBI)?

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. More information on the benefits and disadvantages can be found in our BIMBO fundamentals 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. 

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. 

Why use our commercial finance solicitors?

We can assist you with your requirements and walk you through the MBO or MBI legal processes to guarantee a smooth transaction. 

We regularly give legal advice throughout all stages of a transaction to a wide range of clients, including: 

  • investors 
  • arrangers 
  • finance companies 

This expert advice includes financing for private acquisitions, asset purchases and takeovers. 

Our finance solicitors will also work closely with your corporate and tax teams to cover all aspects of your deal, so you won’t need to use a range of solicitors for your transaction. 

Back to table of contents

Contact us today

Call 0800 689 1700 today for an initial consultation, or email us at enquiries@hjsolicitors.co.uk. We’ll discuss your situation in more detail, providing advice on whether we can help you and on your best route forward. You can also fill out the short form below and we’ll get back to you within 24 hours.

  • Your data will only be used by Harper James Solicitors. We will never sell your data and promise to keep it secure. You can find further information in our privacy policy.

  • This field is for validation purposes and should be left unchanged.

A national law firm

We mainly work remotely, so we can work with you wherever you are. But we can arrange face-to-face meeting at our offices or a location of your choosing.

Our commercial lawyers are based in or close to major cities across the UK, providing expert legal advice to clients both locally and nationally.

Floor 2, Cavendish House, 39-41 Waterloo Street, Birmingham, B2 5PP
Stirling House, Cambridge Innovation Park, Denny End Road, Waterbeach, Cambridge, CB25 9QE
10 Fitzroy Square, London, W1T 5HP
13th Floor, Piccadilly Plaza, Manchester, M1 4BT
Harwell Innovation Centre, 173 Curie Avenue, Harwell, Oxfordshire, OX11 0QG
2-5 Velocity Tower, 1 St Mary’s Square, Sheffield, S1 4LP
Like what you're reading?

Like what you're reading? Get new articles delivered to your inbox

Join 8,153 entrepreneurs reading our latest news, guides and insights.

Subscribe