Many small company acquisitions are funded as leveraged buyouts.
In these situations, the purchasers try to maximise loan funds while keeping their equity input to roughly 10%. To fund the purchase, the purchaser uses the company’s assets such as equipment, real estate, or inventory as security for debt. Leveraged buyouts of small businesses often combine seller finance with a loan or other financing. This is a good way to increase the amount available to fund an acquisition. However, it’s important to weigh the benefits and drawbacks.
If the purchased company is highly leveraged and has a significant debt burden the new owners will have limited scope to respond to any problems that may arise and the chances of it failing are therefore increased.