What Is A Leveraged Buyout?

A Leveraged Buyout (LBO) is an acquisition strategy where a company is purchased primarily using a significant amount of borrowed money (debt) rather than the buyer's own capital (equity). This high proportion of debt, or "leverage," can range from 70% to over 90% of the total purchase price.

The acquiring party, typically a private equity firm, uses the acquired company's assets and expected future cash flow as collateral and the main source of debt repayment. The goal of an LBO is for the buyer to use a relatively small initial investment to control and restructure a large company, make it more profitable, and then sell it years later for a significant return. While LBOs offer the potential for high returns on a small investment, the high debt load creates substantial risk if the company's performance falters.