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Leveraged buyout (LBO)

A leveraged buyout (LBO) occurs when the buyer of a company takes on a significant amount of debt as part of the purchase. The buyer will use assets from the purchased company as collateral and plan to pay off the debt using future cash flow.

In a leveraged buyout, the buyer takes a controlling interest in the company. This lets the buyer set new goals for the business and restructure the management team to achieve them.

Two common forms of leveraged buyout are:

  • Management buyout (MBO)—when a company’s senior management team purchases all or part of the business
  • Buy-in-management buyout (BIMBO)—when external buyers partner with senior management to purchase the business

More about leveraged buyouts

In a leveraged buyout, the buyer may replace all or part of the current management team, or keep the existing managers and reward them for meeting new goals. In all cases, the new owner is actively involved at the board level.

Sometimes, buyers will also leverage their personal assets and cash flow when buying the business. However, this rarely happens in larger acquisitions, as the money involved is often quite substantial. Money for these acquisitions can be raised from multiple sources including banks, development banks, private equity firms, trust companies, pension funds and so on.

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