Leveraged Buyout

A Leveraged Buyout (LBO) takes place when a company is bought with a combination of debut and equity financing.

Typical Seps of a Leveraged Buyout (LBO)
  • A company is bought
  • The purchase is financed with a combination fo equity and debt
  • The debt is secured by the cashflow of the company(this is where the 'leverage' comes from
  • Improve the companie's operations
  • Sell the company privately or take it public

Common Characteristics
  • Commonly used to take a public company private
  • Commonly used to purchase profitable cash-flow positive companies
  • The tactic is commonly used by Private Equity Firms
  • Often times the purchases will provide themselves with a large cash dividend at the time of the transaction (funded by the new debt)

  • The firm being acquired is usually priced based on an EBITDA multiple.
  • EBITDA is used because the acquire plans to restructure how the company is financed and taxed.  Therefore a valuation based on operations is used.

History and Similarity to Private Equity