Best LBO Exit Strategies To Consider

This article provides insight into the types of LBO exit strategies, exit strategies for start-ups, benefits of LBO, and examples of LBO.

Lack of exit planning may prevent many entrepreneurs from achieving their personal and business objectives because their professional assets comprise a large portion of their net worth. Exit strategy involves more than just selling a company. Entrepreneurs have a wide range of options when determining how to exit their business, each with a unique set of repercussions, deadlines, and preparatory requirements.

Leveraged buyout options are a potential solution that can help business owners convert a portion of an illiquid professional asset into a liquid personal asset. This article provides insight into the types of LBO exit strategies, exit strategies for start-ups, benefits of LBO, and examples of LBO.

LBO Exit Strategies

A business exit strategy explains the measures an owner must take to sell their business for the highest possible price. LBO exit strategies are one of the most effective options available. Leveraged acquisitions happen when a buyer borrows money or incurs debt to acquire another business. Also, the buyer utilizes both their assets and the acquired business assets as collateral. Financial models can simulate multiple possibilities and situations in which an LBO is an appropriate choice.

What is LBO and how does it work?

In corporate finance, LBO is a commercial transaction in which debt (bonds or loans) is used as the main funding source to pay for the acquisition of a company. From an entrepreneur’s perspective, it is one of the finest buyout situations because it has a debt-to-equity ratio of 90:10.

One of the largest leveraged buyouts in history took place in 2006 when Kohlberg Kravis Roberts & Co. (KKR), Bain & Co., and Merrill Lynch acquired Hospital Corp. of America (HCA). The three companies estimated HCA’s worth at about $33 billion. Large-scale LBOs witnessed a resurgence during the COVID-19 pandemic, even though the number of large acquisitions fell after this incident. A group of investors led by Blackstone Group announced a leveraged acquisition of Medline in 2021, valuing the manufacturer of medical equipment at $30 billion.

Types of LBO

The financial analysis of a leveraged buyout transaction will determine if it is profitable or not. Three reasons that fall under the general category of corporate acquisitions are commonly served by LBOs. The first is, the privatization of a publicly traded company, the second is Funding spin-offs and the third is Executing private property transfers is usually associated with ownership changes in small businesses.

Types of LBO

  • Public to private  – When a publicly listed firm undergoes privatization, private investors combine the public shares, enabling them to remove these shares from the market. As a result, the investors will now own or possess a sizable portion of the target company. They can utilize debt to finance the acquisition because a substantial amount of capital is needed to purchase all or the majority of a company’s net value.
  • Private deals – This circumstance pertains to situations in which an investor group purchases a privately held business. Such problems frequently occur when a small business owner who has reached retirement age wants to sell the business but cannot find a corporate buyer or does not want to sell to a company. The buying group may consist of company employees or people connected to the owner. Due to their little equity, these individuals establish an LBO.
  • Spin-offs – Public or private companies frequently want to raise money by selling off parts of their operations. There are instances where the seller was acquired through an LBO and is now spinning off assets to repay the investors. In certain circumstances, the management of the spun-off piece may act as the buyer or as a passive party to the transaction. The division or subsidiary being purchased is done so through an LBO. These transactions still follow the same basic financial principle.

Assessing the Benefits and Risks of LBO

In an LBO, a company tries to purchase another company by taking out a substantial loan to pay for the acquisition. The assets of the acquired firm can then be used as collateral against the bonds that the acquiring firm issues against the combined assets of the two businesses.

Benefits and Risks of LBO

Benefits of LBO

  • Entrepreneurs can change the organizational structure and activities after switching from public to private ownership. This increases their chances of succeeding and gives them more power.
  • If the purchased firm generates enough cash, purchasers will experience large financial gains because they do not have to put much of their money upfront in a leveraged buyout scenario.
  • A buying company can use the LBO technique to save a business about to close due to significant losses incurred, thereby giving it a fighting chance to survive.

Risks involved in LBO

  • Sometimes the employees of the purchased company do not share the new leadership’s goals. In effect, this undermines employee morale and promotes a toxic work atmosphere.
  • If the investment company is unable to pay its obligations, then bankruptcy is a possibility.
  • To turn around the purchased firm, the purchasing corporation must implement severe cost-cutting initiatives. Also, this finally leads to layoffs of employees.

What is the LBO Exit Strategy?

An exit strategy should allow financial buyers to realize investment returns. The most popular exit methods include outright selling the business to a strategic buyer or another financial sponsor, an IPO (initial public offering), or a recapitalization. A financial buyer normally anticipates using one of these ways to recover its LBO investment in 3 to 7 years

It is challenging to support a prediction that the exit multiple would be higher than the entry multiple, even if exiting the investment at a multiple more elevated than the acquisition multiple will benefit a sponsor’s IRR (known as “multiple expansion”). Multiple expansion is typically an unjustified assumption, and exit assumptions must represent actual techniques and multiples (exit multiples should typically equal purchase multiples).

Understand Exit Strategy in Start-ups

Selling the business to a larger one for a profit is the primary exit strategy for entrepreneurs. Key executives and employees from the start-up frequently remain at the company for a long time to cash out and vest their stock when the buyer purchases the start-up using cash or stock as payment. Exits give start-up investors money, which they can then give back to their limited partners or themselves (in the case of venture capitalists) (in the case of business angels). It is crucial for start-ups and businesses seeking investment from angel investors or venture capitalists to include the exit strategy in their business plans.

Why do start-ups opt for an exit?

The following situations highlight the reasons why start-ups choose exit strategies:

  • When the initial public offer is awaiting. This is possible when there is a diverse and wide customer base, strong staff, and profitable finances.
  • Due to uncertainties about potential market developments, successful start-ups may choose to sell their companies.
  • Recurring losses after adopting numerous strategies to stabilize the business.
  • After start-ups have validated their business strategy and all that remains is an operational difficulty, entrepreneurs choose to sell up the existing business and rediscover the spark in a new field.
  • Stress is a key cause of sickness, and some businessmen choose to exit their businesses rather than burn out totally.
  • From an individual’s perspective changes in lifestyle may also encourage exit options for entrepreneurs.

How does the LBO Exit Strategy Work?

Using the value of the target company’s assets and partnership interests as collateral, an LBO enables a buyer to acquire a business with less cash. With conditions that credit the business they have developed, the seller receives a peaceful exit from their enterprise. LBOs bring up several issues for you as a buyer. They are:

  • Can you handle the leverage here?
  • Are you paying too much for this item?
  • What are your initial moves?

As a seller, the following issues will be addressed

  • Is this the ideal time to sell?
  • What can be anticipated from the procedure?

An LBO can help businesses expand and become more valuable. It can also be an effective exit strategy or estate planning instrument that releases retirement wealth that has been built up in the business.

Types of LBO Exit Strategies

To deliver prompt returns to their Limited partnerships, most sponsors seek to exit or monetize the target investment within a holding period of five years. These returns are often realized through an IPO, a sale to another sponsor, or a sale to another company (a “strategic sale”).

A dividend recapitalization, which is the issuing of new debt to pay shareholders a dividend, is another way for sponsors to gain profit before leaving. Ideally, the sponsor will have significantly enhanced the target’s equity value by the end of the investment horizon. This is possible by raising the target’s EBITDA through organic or inorganic growth, acquisitions, expansions, diversifications, and increased profitability. For sponsors, the following are the main exit strategies M&A , Dividends / Recapitalizations ,IPO.

Types of LBO Exit Strategies


A typical M&A transaction involves assuming an exit multiple, calculating Enterprise Value based on that, and then converting that value back to Equity Value by deducting net debt. The IRR and numerous for the private equity company are then determined. This is done by considering the firm’s initial investment and the amount it receives upon exit.

The date of the exit and the multiple is a little unpredictable. But overall, it is a fairly clean process because the firm simultaneously sells 100% of its stock to other firms.

Dividends / Recapitalizations

This isn’t an “exit plan” because the private equity firm holds the company eternally. The company keeps paying the private equity firm dividends from its excess cash flow. To pay these dividends, the business may eventually incur more debt. The issue is that the business can only pay dividends with the available cash flow, often much less than its EBITDA. This strategy may be successful if the company experiences rapid growth and is a “cash cow” enterprise with high margins and a high FCF (free cash flow) yield.

But generally speaking, achieving a high IRR solely through dividends is challenging because it may take a very long time to recoup the initial investment. Over an extended period, the MoM (Multiple of money) would be appropriate, but the IRR would ultimately be so low that very few PE firms would be interested.


When a company goes public, the PE (private equity) firm cannot sell all of its stock since that would send a very wrong signal to other investors and potential new ones. Instead, the company must gradually sell off its assets. The MoM multiple is the same if the share price stays the same, but the IRR is lower because it takes longer to recover the same amount. A rising share price over time certainly benefits the company, while a falling share price burdens them.

However, if the share price changes significantly, it could work for or against the company. The MoM multiple may be about the same or greater or lower depending on the share price movement, but the IRR generally tends to be lower in an IPO because the PE firm takes a longer period to sell its holdings.

Optimize Your Exit Strategy with Eqvista!

You must have an exit strategy to continue operating your business without worrying about its future. Therefore, a company should start preparing the strategy during the initial phase of its business.

During exit strategies such as IPO and M&A which are common, businesses must ensure a precise valuation and a clear-cut equity management strategy in place. With Eqvista’s business valuation software, you can optimize your exit strategy fostering long-term investment relationships with investors! The team of experts at Eqvista facilitates to devise of business valuation plans that effectively meet your requirements. To contact us click here. Make use of our free premium account by signing up for it.

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