A leveraged buyout (LBO) is the acquisition of a company using a significant amount of borrowed money to finance the purchase. In an LBO, the buyer contributes a relatively small portion of the purchase price as equity while obtaining the majority of the required funds through loans or other forms of debt. The assets and future cash flows of the target company are often used as collateral for the borrowed funds.

Private equity firms are among the most common participants in leveraged buyouts. They seek companies with stable cash flows, strong assets, and growth potential because these characteristics make it easier to service and repay the debt used in the transaction. After acquiring the company, the new owners typically focus on improving operations, reducing costs, increasing profitability, or expanding the business to enhance its value.

The main advantage of an LBO is that it allows investors to control a large company with relatively little of their own capital. If the business performs well and the debt is gradually repaid, the investors can generate substantial returns on their initial investment. However, the strategy also carries significant risks. High debt levels can place financial pressure on the acquired company, especially during economic downturns or periods of weak performance.

Leveraged buyouts play an important role in corporate finance and mergers and acquisitions. They can help unlock value in underperforming businesses, but success depends on effective management, strong cash generation, and the ability to meet the financial obligations associated with acquisition debt.