Leveraged Buyouts for Small-Mid Size Businesses

The leveraged buyout acquisition model gained popularity with wall street financiers of the 1970’s and 1980’s. The most notable leveraged buyout in history is Henry Kravis’ KKR taking over RJR Nabisco which was later featured in the book and movie “Barbarians at the Gate.” 

Keen observers of this deal can quickly point out that there is no way the same tactics could be used to take over a local deli or bowling alley. For one, the acquirers don’t have nearly as much access to debt financing as Henry Kravis did. Second, much of the financing utilized call options and other derivatives that are only available for publicly traded companies. So how is it possible that a small to mid-sized business can be sold with the leveraged buyout model. In addition, we’ll explore the idea of there being better options available for sellers.

What is A Leveraged Buyout

A leverage buyout is when the purchase of a business is made by financing the target companies assets. For instance, if you wanted to buy a trucking company that owned all of it’s trucks outright, you would take a loan against their trucks to help finance the purchase of the business.

What type of business can be bought with an LBO

Leveraged buyouts have been the standard in the industry for decades. They are especially viable for acquiring businesses that have a high level of assets. 

If the target company has a high level of assets, this means that more capital can be raised with the assets as collateral. 

This also means there are likely less acquirers for this business because its asset heavy nature does not appeal to investment firms that manage money for investors.

What are the risks of an LBO

As with any business scenario that involves debt, an LBO can be risky if the acquirer loads the company up with such a heavy debt burden that the business can’t possibly pay it off. It is then forced to liquidate. Even the liquidation process can end up being beneficial to the acquirers, so this model appeals to the corporate raiders who we believe give our industry a bad name by not having any regard for the companies or its employees well being.

In addition to suffocating levels of debt, traditional LBO’s do not align all parties interests. The seller will not receive future payments if the business cannot first service it’s debt, the business employees will be out of work if the business can’t service its debt, and the buyer has brought little value to the company with either capital or management expertise.

Are there any better options than an LBO

The short answer is, Yes. There are multiple variations on the traditional LBO model that address one or more of it’s flaws. At Minerva, we believe that we have structured an acquisition model that is far superior to the traditional LBO. 

We align all parties interests, put a much smaller portion of debt on the books, provide higher compensation to both seller and management team and bring an ecosystem of service companies in to assist the company with it’s future growth (legal, finance, marketing, etc).

If you are entertaining the thought of selling your small to mid sized business, we encourage you to read our selling a business industry overview post to learn more about our unique acquisition structure and reach out to us if your business meets our minimums and you would like to discuss further.


If you are considering selling your business but want a better idea of how your employees will be compensated, Have a look at our articles on Employee compensation,