Hi, Carl Allen here. Today we’re going to talk about leveraged buyouts (LBOs).
What is an LBO?
It’s the way we do deals at Dealmaker Wealth Society (formerly Ninja Acquisitions). All of our partners — and all of our members of our different programs — are doing LBOs.
Basically, we’re buying businesses without using our own money. We’re using other people’s money (OPM).
Sometimes we make a closing payment to the seller when we take ownership, and we use leveraged finance for that. We use the assets in the business to generate some cash and we talk to other investors who put some of that money in.
That’s part one of the payment. That’s what the seller gets at closing, which is the day we take ownership.
Part two of the payment is what we call seller financing payments. In Europe, it’s called deferred consideration. In other parts of the world, it’s called vendor financing.
But effectively, it’s just paying the seller some of the money to buy the business over time — using the business’ ongoing profits, the ongoing cash flow, to be able to make those payments.
This is the type of deal we typically do — leveraged buyouts, LBOs, no-money-down deals, whatever you want to call them.
Now, these leveraged buyouts that we’re doing range typically between $1–10 million in annual revenues. But technically, an LBO can work for any type of business.
In fact, one of the largest LBOs ever done was the leveraged buyout of a company called RJR Nabisco in the late 1980s.
There’s an absolutely wonderful book called Barbarians at the Gate that tells that story of how Henry Kravis, a Wall Street private equity investor, bought that company off the stock market — a public to private transaction — and did that deal without spending his own money. He used OPM — equity, debt, junk bonds, all those different things.
I strongly recommend you read this book if you want to understand what LBOs are and how they work. Because what we’re doing is not too dissimilar to how this deal was structured.
We find good businesses and negotiate to buy those businesses in an LBO model. Sometimes we make a down payment and in some cases we don’t.
In one deal I closed a little over a year ago, I acquired a business called Radio Express through a leveraged buyout, and it didn’t involve much of a down payment. It was only a few thousand dollars, so most of the money will be paid to the seller over time.
That’s what an LBO is at the absolute core.
Now, let’s talk about your first deal.
All right, you’ve never bought a business before. You don’t own a business currently. This is all about you getting into the game as a business owner.
You might be working a 9-to-5… Or you might be a consultant, which means technically you own a business, but it’s really just a job — you’re selling your time for money.
Your first deal is all about giving you that leverage, that scale, and building an organization that can work without you, generating cash flows for you.
There are a number of factors you need to consider when you’re doing that first deal. Here are three big ones…
- If you’ve never bought a business before, what’s really important is that you buy a business in a sector that you know.
Let’s say you’ve worked in the IT sector. Perhaps you’ve been a software engineer for IBM or HP (where I used to work). Then, naturally, you’d go and buy a business in the IT sector.
It doesn’t necessarily have to be software — it could be semiconductors, printers, hardware, devices, services, it could be an online business — it doesn’t really matter.
But it’s important that you stay within your lane. That’s a common phrase in entrepreneurship these days — stay within your lane — and it’s very, very important when you’re buying a business.
If you’re a software person, you’ve got a network, you’ve got skills and experiences. You wouldn’t go and buy a retail store, or a restaurant, or a chemical processing business. You’d buy something in the IT space because you know the sector.
That way you can have intelligent conversations with sellers, which is really, really important when you start to build rapport. You can also have intelligent conversations with financiers, because in a lot of LBOs you’ll need to raise a little bit of capital to pay the seller some money at closing.
Having those intelligent conversations with lenders, who aren’t going to know anywhere near as much as you about that particular sector, positions you as a trusted, credible, high-worth person who’s going to be doing this deal.
- You also want to do deals in areas you’re really passionate about.
So if you’ve worked in software and you hate software — it’s driving you crazy — then go do something in IT services, which might be something that you’re a bit more passionate about.
You can still leverage your experiences, your network, your skills and all of the stuff you’ve done in your life and career to date. But the bottom line is it’s got to be something you’re excited about — being a business owner in that particular sector.
- The other thing that you really want to think about is probably the most important… What do you want to do with that business once you’ve bought it?
Typically, all of the people I coach and mentor to buy businesses choose one of two paths. Some want to be an owner-manager — so they want to buy the business and then go into that business every day and operate it.
There’s nothing wrong with that if that’s what you want to do. But obviously, that means you need to buy a business where you live, which narrows your choices.
On the other hand, if you live in, say, Miami and want to buy a business in LA, you could become an owner-investor — which is what I am.
I own nine different businesses all over the world. I don’t work at any of them. I spend probably 60–90 minutes per week reviewing those businesses. That’s it.
So if you’re an owner-investor, you’re not actively in the business every day. You can hire a general manager to run the business for you.
You can even give them a little piece of the equity because — if you’re doing an LBO — you’re not necessarily spending your own capital to get that deal done.
There you have it.
These are the three most important factors you want to be thinking about when doing your first deal.
Next time, we’ll look at the different types of LBOs you can do after you’ve done your first deal.
Until then, bye for now.
Editor & co-founder, Dealmaker Wealth Society
P.S. Want more of Carl’s guidance? Sign up for his Executive Briefing here to receive Confessions of a Dealmaker. This free e-letter will bring you Carl’s business buying secrets, stories and techniques six days a week. All you need to get started is an email address. Click here to join.