LBO structure : common + preferred stocks questions
Hi guys,
The company I work in is currently looking into buying a small event/marketing business.
The idea would be to buy it from the existing owner and let a few incentivized guys from the management run it (as it is profitable).
Someone mentioned to us that it would be better to have a combination of cheap Common + Preferred Stocks.
Assuming we buy this company or US$ 1m, US$ 100k in common and 900k in preferred.
Could someone walk me through the mechanics and pros/cons of such a deal please?
Off the top of my head, here are the first questions I can think of:
How do we actually buy the business from its current owners: do we acquire 100% of the business for US$ 1m in cash THEN change the capital structure to reflect the common + preferred stock?
What would be the accounting treatment of the Preferred Shares?
What happens when the company redeems the preferred shares over time? (I suppose that it is akin to a stock buyback in a way: assuming company is growing and doing well, the denominator is smaller so common stock increase in value)
Thanks a bunch for your help!
Simon
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