Buyouts – Venture Capital

Buy-outs are a recent addition to the services provided by merchant bankers and saving institutions, and a new form of investment on the European venture capital. US Banks first launched the concept of buy-out, already in practice in the UK, during the recession in the late sixties and seventies.


Buy outs are popular among the investment managers on account of the following reasons:

1. Lower investment risk
2. Growth of small enterprise
3. Industrial de-concentration
4. Owner manager concept of business
5. Development of new entrepreneur
6. Management commitment, motivation and drive
7. Good personal relation
8. Facilitating the importation of technological knowledge problem solving devices etc
9. Better industrial relations
10. Enhanced management performance
11. Balanced mix of talents to achieve optimal results and productive efficiency.
12. Revenue earning objective is implemented from the first day to generate cash and liquid assets in order to meet the cost of borrowings and earn profits.


Following are the precautions to be taken for ensuring the success of buy-outs by venture capitalists and merchant bankers:

(a) Avoiding conflict between management teams
(b) Reduction of excessive initial debt-gearing
(c) Adequacy and conducive atmosphere in the management team for the buy out enterprise
(d) Ensuring pre-investment market survey to locate potential market is order to ensure an adequate market share
(e) Ensuring sufficiency of cash


Buy out deals are of the following types:

1. Management buy-outs
2. Shareholders buy-outs
3. Receivership buy-outs

Management Buy-outs:

Management buy-outs also known as corporate sale buy-outs are a type of buy-out whereby existing entrepreneurs transfer the controlling interest to another entrepreneur. The by-out usually involves 100 percent sale of the total business. It may also be a partial or complete divestment, where the original promoter may retain either a minority interest or none at all in the enterprise. Management buy-out may also be for a subsidiary division or operating in different form, such as business entity or product names.

Corporate sale buy-outs are preferred in circumstances where the unit is unprofitable, but could be rendered profitable through a buy-out. The unit is subsidiary to the core activity, and is required to be separated from it in order to concentrate on the core activity. This way the management resources have greater opportunity cost elsewhere with the post merger rationalization of unwanted activity.

Management Buy out may take the following forms:

Small scale corporate sale: This comprises of debt based small scale buy-outs, equity based small scale buy-outs and deferred consideration buy-outs. The management team of the company may acquire the business from its parent company at an agreed value. Debt based small buy outs have a higher proportion of debt included in the deal of assets, where realization within a short period is possible in order to repay the debt from assets surplus. Equity based small scale buy-outs assume no assets disposal and investors may take the equity base as equal to management. In the deferred considerations of buy-outs the vendor may leave a part of the consideration money at no interest rate for several years, and the external debt element in the structure can be reduced.

Large scale corporate sale buy-outs:

These are larger buy-outs and are syndicated by several investors.

Shareholders Buy-outs:

Share repurchase involves the existing management team buying out the controlling holdings from the original promoters, who wish to retire from the management. This is done with the help of Venture capitalists who supply the required funds.

Receivership Buy outs:

It resembles to start up financing. A new company is formed to take on the assets and trading names of the group. The capitalization of a new company depends partly on the valuation of assets being acquired from the receiver at a discount.