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How does a leveraged buyout work?

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Quick answer

A leveraged buyout (LBO) is buying a company mostly with borrowed money, using the target company's own assets and cash flow as collateral and to repay the debt. Private equity firms use LBOs to acquire businesses with relatively little of their own cash.

Step by step

  1. A company is bought mainly with borrowed money.
  2. The target's assets and cash flow secure and repay the debt.
  3. The buyer invests relatively little of its own cash.
  4. It's a signature private-equity strategy.

People also ask

How does a leveraged buyout work?
A buyer acquires a company largely with debt, then uses the company's cash flow to pay that debt down.
Why use leverage to buy a company?
It lets buyers acquire much larger businesses than their own cash alone would allow, amplifying returns.
What are the risks of an LBO?
Heavy debt can overwhelm the company if its cash flow falters, risking default or bankruptcy.