Leveraged buyout (LBO)
Principles of Finance glossary · Capital Budgeting
Definition
An acquisition in which a financial sponsor purchases a target using 50-70% debt secured against the target's assets and 30-50% sponsor equity. Returns are driven by three levers: EBITDA growth, multiple expansion at exit, and debt paydown from operating cash flow over a 3-7 year hold period.
Leveraged buyout (LBO) in plain English
An LBO is buying a company mostly with borrowed money, using the company you're buying as the collateral for those loans, a bit like buying a rental house with a big mortgage and using the rent to pay it down. A 'financial sponsor' (usually a private-equity firm) puts in only 30-50% of the price as its own cash and borrows the other 50-70%. The plan is to hold the company for 3-7 years and make money three ways: growing its profits, selling it later at a higher price tag, and using the company's own cash flow to shrink the debt. Because so little of the buyer's own money is at stake, even modest improvements can turn into large percentage returns, though heavy debt makes a stumble dangerous.
Also called: LBO
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