3 ways debt can be used to finance a share buyback
Did you know that in the event of a shareholder wanting to leave a tech company due to retirement, moving onto another venture or indeed an acquisition, you can borrow money to buy back shares?
OK, I know what you’re thinking, when you take on debt, at some point, you must repay or refinance the loan.
Here’s the thing. As long as your company isn’t overleveraged, has substantial recurring revenues and can service the loan without compromising plans for growth, you can use specialist debt products to fund a share buyback.
But that’s not all. Here are three other reasons why using venture debt to repurchase shares makes sense:
First off, when you use debt to finance a share buyback, you decrease your reliance on equity, and therefore reduce dilution.
Then there’s the fact that when you use debt to finance a share buyback you benefit because interest payments on debt are tax deductible. Which, in turn, reduces your cost of capital.
Beyond that, when you use debt to finance a share buyback, investors often see it as a positive move as it typically increases value for shareholders.
So what types of private debt loans are suitable for share buybacks?
Using debt to finance a share purchase
When a shareholder is no longer involved in your company, you can use specialist debt finance to fund a share purchase to allow the shareholder to cash out and exit the business.
Using debt to finance an MBO
If owners wish to retire from a privately run business, then the management team can consider management buy out (MBO).
Seeing that a management buyout ensures business continuity, you’ll find lenders and investors warm to your proposal.
To finance an MBO typically requires a combination of debt and equity.
In particular, private debt term loans and IP financing can be structured to satisfy this type of transaction.
Using debt finance to buy out a VC or a PE
When your company has achieved its growth targets, and you want to regain control, debt finance can help you to buy out your investors.
What do tech companies need to consider when borrowing to finance a share buyback?
As a tech company, to leverage debt to finance a share buyback, you need to look to the alternative finance sector.
You see, without tangible assets to use as security, traditional bank lenders see you as a risk.
Whereas alternative finance lenders, in particular, private debt funds that write venture debt deals will use IP and patents as security.
But that’s not all, private debt funds are more interested in your growth potential, and ability to attract and retain investors.
Where can a tech company find a private debt fund willing to finance a share buyback?
To save time and money searching the market, talk to a specialist debt advisor who can structure the right deal, evaluate the right debt funding proposals and help you to pick the right option.
And that’s what really matters.
If you’re considering borrowing to finance a share buyback, then drop me a line, and we’ll set up a time to chat.