g cost and managements time are considered worthless by private companies (Pietersz, 2007).However, shareholders will require detailed explanation of the benefits of such a strategy.
Through buyouts, the cash flows of a firm are improved. The value of a firm is the present value of all the future expected cash flows (Bierman, 2003). Because of a reduced cash outflow, the present value of PE will be enhanced. The additional cash inflows arise from tax benefit of additional debt financing. The change in capital structure will enable the firm reduce its tax base at hence enrich the cash flows of the business. There are both advantages and disadvantages of private equity buyouts.
Buying of inefficient performing companies and restructuring them to profitable ventures benefits the whole economy and the owners. Through elimination of these inefficiencies, they create additional wealth to the shareholders by increasing their return on the investments. After a buyout, the capital structure of the firm allows the firm to perform higher interest tax deductions from their income statement (Cendrowski, 2008). Increased tax shield benefit reduces the tax liability of the firm. In addition, the managers of PE have the mindset of achieving their goal within the shortest duration possible and make the sales at a profit. The profit motive of the managers is responsible for the enhanced value of the firm.
Secondly, private equities are better managed than the publicly traded companies. Managers in of the PE rewards are pegged on performance. More still, the managers are sometimes required to put a material proportion of their investment in the investment. This would ensure that they to remain concerned about the company’s performance because any loss that might arise will also be borne by them (Colvin, n.d). Private equity further employed better executives by offering them high salaries.
In addition, the acquired company also stands to benefit from the PE buyout (Cendrowski,