Behind the Leverage - Private Equity & Debt

Hey, it’s David

Let’s dive deep into the latest trends and strategies to help you stay ahead in business growth and acquisitions.

In this newsletter, we bring you hand-picked insights from the worlds of business growth, private equity, VC, capital and M&A, designed to keep you informed and empowered.

• M&A Outlook: Predictions and key trends shaping the landscape in Q4 2024.

• B2B Growth Strategies: Actionable insights for acquiring growth and enhancing client relationships.

• Deal Insight - Understanding the value of debt in private equity transactions  

• And more…

Today’s Newsletter is Sponsored by Rewardful

Learn affiliate marketing for SaaS for $0

Recommended by 700+ SaaS professionals, Rewardful’s free affiliate marketing course aims to help you grow your MRR significantly.

Across 13 videos and 1 eBook, you’ll learn at your own pace how to build and grow a successful affiliate marketing program.

Start Your Free Course Now

My Favorite Finds This Week

Investment Banks, Accounting, Legal & M&A Advisors

• Q4 2024 M&A Activity Outlook: Predictions for M&A growth sectors, including technology and healthcare. (Foley & Lardner LLP)

• Top Global M&A Deals in 2024: Overview of major global M&A transactions and how to execute them effectively. (IMAA Institute)

• Earnout Deals Surge: Insights into the growing popularity of earnouts in deal structures amidst economic uncertainty. (JD Supra)

• Navigating M&A Delays: McKinsey’s guide to managing delays in deals during uncertain times. (McKinsey & Company)

• M&A News (Sep 30 - Oct 6, 2024): Summary of key deals, including Marsh & McLennan’s acquisition of McGriff Insurance Services. (IMAA Institute)

Private Equity, Financing and Other Insights

• SEC Update for PE Firms: New SEC regulations impacting private equity, including compliance challenges and disclosure requirements. (Middle Market Growth)

• Digital Value Creation in PE: How private equity firms drive value through digital transformation in portfolio companies. (PWC)

• Focus on Services Sectors: Private equity firms target consumer and business services amid heightened fundraising activity. (Middle Market Growth)

Business Growth

• 5 Bold Moves for Acquiring Growth: Strategies for leaders to acquire growth in business, including clear decision-making and strong leadership moves. (Solve to Scale)

• 20 LinkedIn Facts to Change Your Game: Key facts and stats about LinkedIn that offer valuable insights into leveraging the platform for business growth. (Richard Van der Blom)

• 10 Tips for Getting Better Clients: Practical advice on attracting and retaining higher-quality clients based on recent experiences. (Ryan Levesque)

Private Equity Deals: The Value of Acquisition Debt

…What Is The Monthly Payment To Own This Plane?

When CEO’s tell me they are in the middle of selling their company to a private equity group, I usually ask if they understand how the acquisition debt will impact them post close.

Instead of getting an answer to my question, the CEO usually answers my question with this question.

“𝗪𝗵𝘆 𝗱𝗼 𝗽𝗿𝗶𝘃𝗮𝘁𝗲 𝗲𝗾𝘂𝗶𝘁𝘆 𝗳𝗶𝗿𝗺𝘀 𝘂𝘀𝗲 𝘀𝗼 𝗺𝘂𝗰𝗵 𝗱𝗲𝗯𝘁 𝘄𝗵𝗲𝗻 𝗯𝘂𝘆𝗶𝗻𝗴 𝗮 𝗰𝗼𝗺𝗽𝗮𝗻𝘆?”

Here’s the short answer: Debt = Leverage = Maximized Returns.

The basic principle behind private equity firms using significant amounts of debt, or leverage, when acquiring companies is that it allows them to maximize investment returns. …and this is the proverbial “leveraged buyout” (LBO).

Points to Consider
Let’s dive into a few more reasons why private equity firms love to stack up on debt when acquiring companies:

1. Increased Returns - Debt is cheaper than equity. By using more debt and less equity, private equity firms can boost their potential returns since interest on debt is tax-deductible, reducing the overall cost of capital.

2. Lower Risk - Using debt to finance an acquisition can actually reduce the private equity firm’s risk. How? The debt is typically secured against the acquired company’s assets, providing a buffer if things go south.

3. Control - Debt also allows private equity firms to retain significant control of the acquired company with a smaller equity investment, maximizing their return on investment while keeping operational control.

4. Alignment of Interests - By structuring the deal with debt, private equity firms often incentivize the management team to invest alongside them. This aligns the management’s focus on generating cash flows to pay down the debt, which serves both parties' interests.

The Bottom Line

For CEO’s who are selling their company to a private equity firm, you must absolutely understand:

• How that debt is going to impact the operations of the business

• How the cash flow the business generates will be used primarily to pay down the acquisition debt

• If the Seller is going to retain equity after the sale

As the Seller, you need to get a financial lesson in the risks and rewards of the structure and how much risk you are assuming by owning equity post close. 

Are you enjoying the content we’re sharing from Boardspire?

I’d love to hear from you, so I’d appreciate your feedback in this quick poll:

Thank you!

David