How does the seller get paid in a LBO - technically speaking
probably a stupid question, but i can't seem to understand the mechanics behind an LBO.
Let's say that the Target company raises debt and equity, and has some cash in its balance sheet. Now the seller need to exchange his shares of the target against the agreed upon price. As I understand it, he should give his shares/stocks to the buyer. The problem is the buyer (PE Firm) doesn't have any money.. all the money is owned by the Target company..
So my question is, technically speaking, how is the cash transferred to the seller? Because at t=0 (before debt is raised and the capital structure of the target is changed), the buyer doesn't have all the funds necessary to buy the whole company from the seller. Buy at t=1, after the cash is raised, it's the target company who has it, and the purpose is not to buy its own shares with it.
I have an incomplete theory: let's say someone (who owns 100% of the outstanding shares of a company) is selling his company for $100, and a PE firm wants to buy it (40% cash and 60% debt). The PE firm First gives the seller $40 in exchange for 40% of his shares, and then the company raises debt and buyback the remaining 60% shares and destroys them ==> making the PE firm owning 100% of the outstanding shares of a very leveraged company. is this theory correct ?
Thanks a lot
A PE fund is a draw-down vehicle with committed capital from LPs. They can call capital when a deal is secured... this is the equity piece. Banks or financing firms will underwrite the entire debt piece and typically diligence alongside the PE sponsor when evaluating an LBO. At close, the entire cash amount in the form of debt and equity will be delivered to the seller and will pay for deal related fees
thank you for your answer, when you say "the entire cash amount in the form of debt and equity will be delivered": who exactly will deliver it ? the target company? the PE Firm ? the banks ?
There will be a number of wires, but the net amounts will all be wired to the sellers save for any holdback/escrow amounts. You best believe the lawyers and bankers are paid at close too! All of the individual wires will be detailed in a funds flow that goes back and forth a number of times in advance of closing and everyone signs off.
thank you, I still find it very confusing. Normally when a company raises debt, it gets cash in return or can buy some assets. In the case of the LBO, the company raises debt, gets cash, but immediatly gives that cash away, so the only way to balance the BS is adjust the fairvalue of assets and then add goodwill.. so basically what the lenders have is the goodwill that the company will probably pay them back in the future, is that correct ?
This is how it usually works (with some case by case variation)
Thank you for this.
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