Buyouts of Acquisitions
This article focuses on acquisitions, especially leveraged and management buyouts. These types of transactions are very unique, and have been around since the 1970s. There is a discussion of Frankel's strategic transaction process. There are several types of investors. Two types of private capital equity are venture capitalists and angel investors.
Keywords Acquisition; Angel Investors; Investments; Leveraged Buyout; Management Buyout; Merger; Venture Capitalists
Finance: Buyout of Acquisitions
"Merger and acquisitions, buyouts, leveraged buyouts (LBOs), management buyouts (MBOs), private equity, venture capital, corporate development, and a myriad of other terms are used to describe large transactions that fundamentally change the nature or course, and control, of a company" (Frankel, 2005, p. ix). However, this article focuses on leveraged buyouts and management buyouts. These types of transactions are very unique, and have been around since the 1970s. Once a rarity, it is very common for a business to be bought out in order to strengthen its worth. Unlike other commercial contracts and agreements, these types of transactions tend to be dramatic and sudden with many businesses losing their independence once the deal has been sealed.
According to Frankel (2005), all of the transactions have some things in common even though the focus and process may be different. Who are the key players in what Frankel calls the "Strategic Transactions" process? These players are the buyer, the seller, investors/owners, corporate staff, advisors, regulators, and others. However, this article will focus on the buyers, sellers, and investors/owners.
The buyer usually refers to a group of individuals that form an entity in order to maximize the interest of the corporation and the shareholders. There are many types of buyers, which include: Strategic buyers, repeat players, newbies or one timers, financial buyers, private equity firms, and management buyers.
- Strategic buyers are usually corporations that are interested in making an acquisition in order to strengthen and upgrade their poor business performance.
- Repeat players tend to go through the acquisition process more than once. As a result, they can recognize what they have done well and strive to improve what they do not do well.
- Most first time buyers are nervous in the beginning, but strive to get the experience of making strategic transactions so that they can become repeat buyers.
- Financial buyers tend to use some form of investor capital in order to acquire control over a target company with the goal of selling the company for a profit.
- Private equity firms are firms that collect a pool of capital from others and then make investments in a portfolio of companies.
- Management buyers tend to partner with a private equity firm in order to acquire a company.
As a rule, sellers do not plan to be in the acquisition business for the long term. Rather, they tend to be in the process for one time only. Selling the corporation is the final step of the shareholders. There are three types of sellers: Partial sellers, full sellers, and unwilling sellers. Many acquisitions involve the sale of part of the company versus the whole thing.
- In most cases, partial sales are usually the first step in a series of transactions of selling the entire company.
- Full sellers have a desire to get rid of the company as soon as possible.
- Unwilling sellers may be the target of another company and the process can be hostile.
There are several types of investors. However, this article will focus on entrepreneurs, private equity, angels, venture capitalists, leveraged buyout and management buyout firms. Entrepreneurs are very creative. Many seek to see their vision become a reality. Once the business is successful, they may decide to "step aside" and let the management team run the company. Many businesses are started with the capital of the founders. However, once the business gets started, they may find that they need additional funding and seek the assistance of private equity firms. Two types of private capital equity are venture capitalists and angel investors.
- Venture Capitalists Venture capital is usually available for start-up companies with a product or idea that may risky, but has a high potential of yielding above average profits. Funds are invested in ventures that have not been discovered. The money may come from wealthy individuals, government sponsored Small Business Investment Corporations (SBICs), insurance companies, and corporations. It is more difficult to obtain financing from venture capitalists. A company must provide a formal proposal such as a business plan so that the venture capitalist may conduct a thorough evaluation of the company's records. Venture capitalists only approve a small percentage of the proposals that they receive, and they tend to favor innovative technical ventures.
Funding may be invested throughout the company's life cycle with funding being provided at both the beginning and later stages of growth. Venture capitalists may invest at different stages. Some firms may invest before the idea has been fully developed while others may provide funding during the early stages of the company's life. However, there is a group of venture capitalists who specialize in assisting companies when they have reached the point when the company needs financing in order to expand the business. Finally, the venture capitalists may provide funding in order to buy (acquire) a business.
- Angel Investors Many firms receive some type of funding prior to seeking capital from venture capitalists. Angel Investors have been identified as one source that organizations, especially entrepreneurs, may reach out to for assistance (Gompers, 1995). "In a nationwide survey of more than 3,000 individual angel investors conducted by the Angel Capital Association, more than 96 percent predict they'll invest in at least one new company in 2007. Also, 77 percent expect to invest in three to nine startups, and five percent think they'll fund 10 or more new companies" (Edelhauser, 2007, “Angel”). This is beneficial for future entrepreneurs who have a dream they would like to pursue.
Including angel investors in the early stages of financing could improve the chances of receiving venture capital financing. Madill, Haines and Rlding (2005) conducted a study with small businesses and found that “57% of the firms that had received angel investor financing had also received financing from venture capitalists” (p. 107). Firms that did not receive angel investing in the early stages (approximately 10% of the firms in the study) did not obtain venture capital funding. It appears that angel investor financing is a significant factor in obtaining venture capital funding. Since obtaining venture capital tends to be difficult, businesses can benefit from the contacts and experience of angel investors in order to prepare for a venture capital application and evaluation. The intervention of an angel investor may make the company appear more attractive to the venture capitalists.
Forming an Agreement
Regardless of how a company decides to finance the venture, it will have to make an agreement that is beneficial to the investor since they are the ones...
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