Leveraged Buyout
Also known as: LBO, Leveraged Acquisition
A leveraged buyout (LBO) is an acquisition financed largely with borrowed money, where the target’s own cash flow is used to repay the debt over time.
A leveraged buyout, or LBO, is the purchase of a company using a significant amount of borrowed money alongside a smaller slice of equity. The acquired company’s own assets and, more importantly, its free cash flow are used to service and repay that debt over the hold period.
Why buyers use leverage
Debt amplifies returns on the equity invested. If a buyer funds 60 percent of a deal with debt and the business grows, the equity holders capture the upside on the whole enterprise while having put in only part of the price. This is the core of how private equity generates returns.
The risk
Leverage cuts both ways. The debt must be serviced regardless of how the business performs, so an LBO depends on stable, predictable cash flow. A highly leveraged company with customer concentration or volatile earnings is fragile, which is why quality of earnings work matters so much before a leveraged deal.