LBO (Leveraged Buyout)
An acquisition financed primarily with debt, where the target's cash flows service the leverage and equity returns are amplified.
Also known as: Leveraged Buyout, Leveraged acquisition
One-line definition
An LBO uses significant borrowed capital to acquire a company, with the debt secured against (and repaid by) the target's own assets and cash flows.
Why private equity loves it
Debt amplifies equity returns: if a business bought for 10× EBITDA is resold at 10× EBITDA with no value creation, the equity IRR is still positive because debt has been repaid.
Classic formula (entry)
Enterprise Value = Equity + Senior Debt + Mezzanine
Equity = EV − Total Debt at entry
TS role in LBOs
Lenders commission their own FDD (sometimes a separate report) to assess whether cash flows can service the debt. TS teams build detailed debt serviceability models.
Related terms
MBO (Management Buyout)
A transaction in which the existing management team acquires the company, typically with backing from a private equity sponsor.
Senior Debt
The highest-ranking debt in a capital structure, with priority claim on assets and cash flows, typically provided by banks or institutional lenders.
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortisation — the most cited profitability proxy in M&A.
IRR (Internal Rate of Return)
The annualised return on an investment, expressed as the discount rate that makes the net present value of all cash flows equal to zero.
MOIC (Multiple on Invested Capital)
The ratio of total proceeds from an investment to the total capital invested, without adjusting for time.