Brief Definition
A leveraged buyout (LBO) is a financial transaction in which a company is purchased using a significant amount of borrowed money, typically through loans or bonds. LBOs are commonly used by private equity firms to acquire companies, aiming to improve their profitability and then sell them for a profit.
Further Explanation
A leveraged buyout (LBO) is a financial transaction in which a company is purchased using a significant amount of borrowed money, typically through loans or bonds. The assets of the company being acquired often serve as collateral for the loans. LBOs are commonly used by private equity firms to acquire companies, aiming to improve their profitability and then sell them for a profit.
Example:
Suppose a private equity firm wants to buy a manufacturing company valued at $100 million. The firm uses $10 million of its own money and borrows $90 million from a bank to complete the purchase. The manufacturing company’s assets are used as collateral for the loan. The private equity firm then works to increase the company’s value, perhaps by improving operations or cutting costs, with the goal of selling the company later at a higher price and making a profit.