A leveraged buy-out (LBO) enables a family business to be transferred to a new owner, while also injecting fresh capital and new ideas. A well-structured deal can also ensure the continuation of a desired ownership and management structure, as well as achieving strong financial returns. Anna Gassner, a partner with the law firm Luther explained.

An owner/manager of a small and medium sized business considering retirement is often conflicted. They want their company to continue to thrive after they have moved on. They also want to ensure that valued managers and employees they have worked beside for years are not made redundant by asset-striping new owners. Yet they also want to maximise financial returns from the sale.

Multiple goals

“Using an LBO structure combines legal and financial leverage effects to make it possible to achieve all these ends,” says Ms Gassner. This effect is augmented when private equity investment is brought into the transaction. Not only does this bring fresh capital to the firm, but it also gives the company access to considerable broad expertise. Bringing these factors together can help the company to innovate and grow.

It's really important to choose the private equity player you want to work with
Anna Gassner

Anna Gassneravocat à la courLuther

For some, the concept of private equity has negative connotations of aggressive management and downsizing. Most often, though, this is not the case as investors are keen to ensure that thriving businesses should continue to generate returns over the long term. Moreover, a buy-out can be organised to ensure that the new owners have a similar approach to strategy as the outgoing owner. “It's really important to choose the private equity player you want to work with,” Ms Gassner advised. Normally this will be a private equity fund, but can also be wealthy individuals introduced via family offices and private banks.

A deal that suits

“Some PE funds focus more on the financial side of transactions, but many others they have investors with considerable industry experience who are particularly motivated to help companies innovate and grow as an equal priority as ensuring profitability,” she said. Investors can become independent directors or management advisors, which gives them intimate knowledge of the firm as they work to help it expand the product range, develop new markets, embrace digitalisation and other interesting strategic goals.

Yet the entity through which the LBO is carried out can be structured to ensure that control remains as desired, be that with family members, managers or third parties. Owners can even consider selling the company to themselves in order to realise these advantages. In so doing they would also help to diversify risk and lighten the management burden. This could also be designed to begin the process of transmission to a new ownership group.

“In these kinds of transaction, you usually need two finance parties: the private equity investor who provides equity, and a third-party financier (normally a bank) who will lend to provide the financial leverage for this transaction,” said Ms Gassner. This logic assumes that business growth will out-strip any rise in interest rates, thus netting a long-term gain.

Considerable investor interest

Private equity investors are keen to back thriving SMEs for several reasons, not least that investments tend to be relatively less volatile than some assets. There is also the human element; the desire to invest in the real economy and support dedicated owner-managers as they work to take their companies forward after retirement.

“There is plenty of interest from investors in neighbouring countries for SMEs in Luxembourg, which has a multitude of mature and profitable SMEs operating in a stable and business friendly economic landscape,” said Ms Gassner. Before coming to the Grand Duchy, she worked in Paris, specialising in LBO transactions across France. She mentioned the Leudelange firm Stoll Trucks as an example of a local firm that has gone through this process successfully.

Finding the right partner and designing an agreement that meets all requirements is rarely straightforward,
Anna Gassner

Anna Gassneravocat à la courLuther

The LBO takes about a year, from finding potential investors, making a selection, working with banks, completing the valuation process, designing the financial and legal structures and completing the made-to-measure deal. “Finding the right partner and designing an agreement that meets all requirements is rarely straightforward, but it is an option that has been made to work successfully for many European family businesses,” said Ms Gassner.