What is Leveraged Buyout (LBO)?

Definition

A Leveraged Buyout (LBO) is an acquisition structure in which a significant portion of the purchase price is financed through debt, with the remaining amount funded by equity from investors. The acquired company’s future cash flows are typically used to repay the acquisition debt over time.

LBOs are one of the most common transaction structures used by private equity firms. The investment thesis generally relies on a combination of operational improvements, revenue growth, margin enhancement, debt repayment and, ultimately, a successful exit.

The optimal LBO structure depends on factors such as business stability, cash generation, leverage capacity and market conditions.

Why it matters

LBOs are a core mechanism through which private equity investors acquire businesses and generate returns for their investors.

In practice

Successful LBO candidates typically have predictable cash flows, strong market positions, resilient margins and opportunities for operational improvement or strategic expansion.