The LBO model can be applied to most any type of deal small or big. Why would we want to do this? How can the purchase of a main street store be compared to the purchase of a aircraft parts manufacturer? How can we use the same techniques to buy either one? There is a simple answer to this. The LBO model, by definition, assumes that the buyer does not have enough money to buy a company. It doesn’t care how big or small the company is. No matter how small the company, the transaction can always be financed. The Bottom line is the LBO buyer will always need to apply the same insufficient cash techniques to any company for which they have insufficient cash to acquire.
For our purposes the LBO is simply a set of creative financing techniques which can be applied at any level of deal size. LBO’s can be constructed at the smallest level, with amounts of $25,000 to $50,000 being borrowed instead of $5,000,000. In fact the smaller the deal the easier it is to do an LBO. This is because the smaller the deal the more flexible the seller will be in accepting terms and creative structures for the transaction. Almost identical principles can be used on the small deal as on the big one. In fact LBO’s can be applied to service, tech and internet companies as well. Admittedly these deals can be more difficult to construct because of the lack of bankable assets but that can work in the buyer’s favor. Market forces will always drive down the price and terms of difficult-to-finance deals.
