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Leveraged Buyout (LBO)

A Leveraged Buyout (LBO) is the acquisition of a company using a significant amount of borrowed money to meet the purchase price. Private equity firms commonly execute LBOs. They partner with investment banks to raise loans and take over target companies, increasing their debt. Cash flow from the acquired company helps repay the debt over time. Companies purchased through LBOs are attractive targets for operational improvements and cash flow growth to pay off the loans. Improved performance also increases the value of the private equity firm’s equity stake. LBOs allow private equity investors to maximize returns through financial engineering. However, high debt loads incurred in LBOs also raise the risk of bankruptcy if cash flows falter.

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