Business, Legal & Accounting Glossary
A leveraged buyout or LBO is the purchase of a business with the price funded by large amounts of debt, i.e., leverage.
Takeover of a company or controlling interest in a company, using a significant amount of borrowed money, usually 70% or more of the total purchase price.
Leveraged buyout (LBO) is a corporate financing method.
It is another name for cash flow lending. It refers to the acquisition of a company via a substantial amount of debt (borrowed capital) raised through bonds or loans. Assets of the company being acquired and also that of acquiring one is often pledged as collateral for loans taken. Leveraged buyout enables companies to go in for massive acquisitions without any mammoth capital commitment. Market analysts add that in LBOs normally for 10% equity a 90% debt ratio is present. These bonds are known as junk bonds.
They are not of an investment-grade due to an extremely high debt/equity ratio. LBOs are often labeled as predatory tactics in corporate circles. It is also alternatively known as a hostile takeover, bootstrap transaction, and highly leveraged transaction. Once a company is acquired through leveraged buyout it is often turned into a private company. This gives acquiring company a greater degree of control over the acquired one. Leveraged buyout concept crystallized in the latter half of the 1960s. Leveraged buyout enjoyed much popularity in the 1980s. Leveraged buyout financing has made a comeback in the post-dot-com collapse era, albeit in a revised format.
When companies go in for leveraged buyout financing they prepare themselves for a host of situations. They need to hire competent managerial personnel where needed, organize a proper business plan, negotiate long-run use and supply agreements, structure fresh employee benefit plans, and initiate effective communication with employees to name a few.
The purchased business often is taken private in the process with a major finance company holding most of the debt. At one time, such deals were often financed by junk bonds, but that method is currently out of favor.
Usually, key executives in the business are chosen to run the new venture. They often invest small amounts of equity and then seek financing. With success, they become owners of the business. In a favorable economic climate, and a viable business plan, LBOs can successfully pay off their debts, but especially in the early days of the venture, the arrangement is fragile. Any unexpected event can cause bankruptcy with the lenders taking charge of the business and the executives losing their equity.
You may find that the best way for your company to proceed is to take on a LBO and get something while you can.
Dan’s rivalry with Phillip increased after Phillip bought out Dan’s McBurger’s in 2002, with the help of an LBO funded by the bank.
Many believe an LBO of a long-standing company, often family owned and geographically placed, is wrong, but economic studies have indicated that LBO‘s more efficiently utilize existing resources and streamline costs if conducted properly.
LBO
Bankruptcy
Business plan
Equity
Finance
Junk bond
Leverage
takeover artist
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This glossary post was last updated: 5th November, 2021 | 0 Views.