Leveraged Buyouts

A leveraged buyout (LBO) is an acquisition of a company that generally uses the company’s own debt as collateral to fund the transaction. During one of these buyouts, a company is purchased with a combination of equity and debt, and that company’s own cash flow is the collateral used to secure and then later repay the loan.

The company performing the leveraged buyout only has to provide a portion of the financing, yet is able to make a large purchase through the use of debt. These days, a buyout such as this is likely to see around 50% of the purchase made up through debt and the remaining through equity. The idea behind a leveraged buyout is that the return generated on the acquisition will more than outweigh the interest paid on the debt.