Leveraged Buyout (LBO)
Private Equity glossary · Advanced LBO Modeling Mechanics & Deal Structuring
Definition
Acquisition of a controlling interest in a company financed substantially with debt (typically 50-70% of enterprise value), with the target's cash flows servicing the debt. Three return drivers per the canonical bridge: MoIC_deal = fracEBITDA_exitEBITDA_entry × (Exit Multiple)/(Entry Multiple) × (Entry EV/Entry Equity)/(Exit EV/Exit Equity) — i.e., EBITDA growth × multiple expansion × leverage effect (deleveraging). Doubling equity over 5 years implies ~15% IRR; tripling ~25%; quadrupling ~32%.
Leveraged Buyout (LBO) in plain English
A Leveraged Buyout (LBO) is buying a whole company mostly with borrowed money, then using that company's own profits to pay the loan back over time. Buyers might put down only 30-50% of the price and borrow the rest — much like buying a rental house with a small down payment and a big mortgage, where the tenants' rent covers the monthly payments. You make money three ways: growing the company's profits, selling it later for a higher price-tag than you paid, and steadily paying down that debt so more of the company's value ends up as yours. Because the borrowed money magnifies your gains, even doubling your own cash in five years works out to roughly a 15% yearly return, and quadrupling it to around 32%.
Also called: LBO
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