Leveraged Buyout (LBO)
An LBO is the acquisition of a company using a significant amount of borrowed money (debt) to meet the purchase cost, with the company's assets often serving as collateral.
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Definition
An LBO is the acquisition of a company using a significant amount of borrowed money (debt) to meet the purchase cost, with the company's assets often serving as collateral.
Use case
Used in alternative investments workflows, analysis, and technical interviews.
Judgment check
Useful only when the assumptions and inputs behind the metric are understood.
Deep dive
How to think about Leveraged Buyout (LBO)
The LBO model is central to private equity. PE firms contribute 20-40% equity and finance 60-80% through debt. The target company's cash flows service the debt over time. Returns come from: (1) deleveraging as debt is paid down, (2) EBITDA growth through operational improvements, (3) multiple expansion at exit.
Example: PE firm acquires Company X for $1B: $300M equity, $700M debt at 6% interest. Over 5 years, EBITDA grows from $100M to $150M, debt is reduced to $200M, and the company sells at 12x EBITDA ($1.8B). Equity value = $1.6B (5.3x return, ~40% IRR).
Rank-ready answer
Definition, example, and interview framing
An LBO is the acquisition of a company using a significant amount of borrowed money (debt) to meet the purchase cost, with the company's assets often serving as collateral.
PE firm acquires Company X for $1B: $300M equity, $700M debt at 6% interest. Over 5 years, EBITDA grows from $100M to $150M, debt is reduced to $200M, and the company sells at 12x EBITDA ($1.8B). Equity value = $1.6B (5.3x return, ~40% IRR).
In an interview, define Leveraged Buyout (LBO), explain where it appears in a real finance workflow, then name one assumption or limitation that a reviewer should check.
FAQ
Frequently Asked Questions
What is Leveraged Buyout (LBO)?
An LBO is the acquisition of a company using a significant amount of borrowed money (debt) to meet the purchase cost, with the company's assets often serving as collateral.
How is Leveraged Buyout (LBO) used in finance?
The LBO model is central to private equity. PE firms contribute 20-40% equity and finance 60-80% through debt. The target company's cash flows service the debt over time. Returns come from: (1) deleveraging as debt is paid down, (2) EBITDA growth through operational improvements, (3) multiple expansion at exit.
Can you give an example of Leveraged Buyout (LBO)?
PE firm acquires Company X for $1B: $300M equity, $700M debt at 6% interest. Over 5 years, EBITDA grows from $100M to $150M, debt is reduced to $200M, and the company sells at 12x EBITDA ($1.8B). Equity value = $1.6B (5.3x return, ~40% IRR).