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Leveraged buyout is a financial transaction in which public shareholders are bought out through the use of outside capital (debts), thus, converting the firm to private status. LBOs also enable one company to acquire another one without having to commit excessive amounts of capital.

Although LBOs require more discipline of management to control costs, the high debt/equity ratio exposes the company to bankruptcy or default if the interest payment is so large that the company’s operating cash flow is unable to meet its obligations.

Leveraged buyout can be in the form of management buyout (MBO), management buy-in (MBI), secondary buyout, and tertiary buyout.

Factors taken into account for a leveraged buyout are:

  • Quality of the asset to be acquired
  • History and experience of the financial sponsor
  • Amount of equity supplied by the financial sponsor
  • Economic environment

The execution of a leveraged buyout is an expensive undertaking, and can prove to be a very complex operation. Allow TWC Finance advisers to educate you about LBOs and guide you during the process.