Sign inWhat is a leveraged buyout?
A leveraged buyout is the acquisition of a company using a significant amount of borrowed money, where the target's own cash flow services the debt.
How practitioners use it
The structure works because debt is cheaper than equity and because repaying it transfers enterprise value to the equity holder over time. Three levers drive the return: operating growth, debt paydown, and multiple change at exit.
The discipline is that leverage cuts both ways. The same structure that amplifies a good outcome makes a modest miss on EBITDA existential when interest coverage is thin.
Every private equity interview eventually reduces to this: can you say where the return came from and which lever you are relying on.
Worked example with round numbers
01
Buy at 10.0x on 100 of EBITDA for an enterprise value of 1,000, funded with 500 debt and 500 equity.
02
Grow EBITDA to 128 over five years and repay 220 of debt with free cash flow.
03
Exit at 10.0x for 1,280, subtract 280 of net debt, and equity is 1,000 for a 2.0x MOIC.
Where people get it wrong
- Relying on multiple expansion for most of the return.
- Forgetting to subtract remaining debt when computing exit equity.
- Ignoring whether the cash flow can actually cover interest in a downside case.
Learn it by using it
Definitions stick once you have run the numbers yourself. The desk below is free and needs no signup.
Run the Paper LBO Challenge