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Protecting Against the Risks of a Leveraged Buyout

Posted by Todd Davison on May 31, 2023 1:00:00 PM

After the 2008 financial crisis, the popularity of leverage buyouts experienced a decline, but the use of this dynamic acquisition strategy is on the rise once again. 

 In this blog, we’ll explore the ins and outs of a leveraged buyout, why it might be an attractive option for your business and the importance of protecting yourself through personal guarantee insurance.


What is a leveraged buyout?


A leveraged buyout (LBO) involves purchasing another company by utilising a substantial amount of borrowed capital, such as loans or bonds to cover acquisition expenses.

Typically, the assets of the target company are used as collateral for the loans and therefore becoming ‘leveraged’. The primary goal of an LBO is to acquire target company by utilising its existing balance sheet position in order to buyout the shareholders for a new owner to take control of the business. New owners identify target companies where they believe they can improve its financial performance, enhance its value and generate returns for the acquiring party. 


What are the advantages of a leveraged buyout? 


Here are the 3 key reasons why an LBO may be an attractive option for both the target company and the acquiring party: 


-    Boost business potential 

An undervalued business may benefit from the infusion of new capital, fresh strategic direction and operational improvements that the acquiring company introduces, helping to unlock potential and drive growth.  


-    Management incentives

During an LBO transaction, the existing management team of the target business are motivated to strive for the buyout’s potential success. This shared interest can enhance operations and bring more value to the shareholders.  


-    Control

Provides a new owner of the business to acquire control of the target company without needing to build it from the ground up. The new owner will benefit from established processes, distribution opportunities and operational infrastructure.


The importance of personal guarantees in leveraged buyouts


When entering into an LBO, it is common for the lender providing the leveraged finance to request the personal guarantee from the acquiring parties involved in the company, such as company directors.

Signing a personal guarantee means taking personal liability for the repayment of debt incurred during the buyout, even if the company fails to meet its obligations. 

This is a significant commitment, which is why it is crucial to understand the risks and take measures to mitigate them.  


-    Personal liability


As previously mentioned, if the LBO does not go as planned and the company fails to meet its financial obligations, you may be held responsible for any debts that have incurred. This presents an enormous risk to your personal assets, such as savings, property or investments. 


-    Impact on creditworthiness 


The personal guarantee is a commitment to lenders, and any default on the debt can negatively impact your credit score. This can make it challenging to obtain future loans or lines of credit, affecting your future financial stability and opportunities. 


-    Legal costs 


In the event of your company defaulting on repayments, legal proceedings can ensure to enforce the personal guarantee, resulting in costly legal fees and expenses. 


-    Partnership risks


If multiple individuals sign personal guarantees for the LBO, there is a shared liability. If one party is unable to fulfil their obligations, the remaining guarantors may be responsible for covering the shortfall. 


Personal Guarantee Insurance from Purbeck 


At Purbeck Insurance, we understand that signing a personal guarantee for an LBO involves significant risks. 

That’s why we offer personal guarantee insurance (PGI) to help safeguard your assets.  

We’re the leading provider of PGI in the UK, offering policies that cover up to 80% of the assets used for your personal guarantee. 

To find out how our policies can help you navigate an LBO with confidence, don’t hesitate to get in touch with our team today. 

Get in touch

For more information or to speak to one of our underwriters contact us today.

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