Leveraged buyouts are commonly used in the process of business acquisitions. So, what is a leveraged buyout? A leveraged buyout is defined as an acquisition that takes place with a blend of equity and large amounts of borrowed money.
Put simply, the answer to the question: What is a leveraged buyout? It’s when a company is bought out and the buyer uses money that is largely from loans to pay the seller. The debt ratio of leveraged buyouts varies depending on the risk of the buyout. If a company has very steady cash flows and is a secure and stable company, the debt can reach peaks of 100%. Usually, for mid-market companies, the loan amount is a multiple of 3.5 times historical EBITDA.
Why is a leveraged buyout beneficial for equity sponsors? Financial sponsors are looking for higher leveraging, as higher leverage can increase returns. Also, using more leverage can result in more shares to be allocated to management through option programs.
To summarize what is a leveraged buyout, it’s an acquisition that is financed by a high percentage of borrowed money. The buyer can be the management team, an equity sponsor or even a strategic acquirer. Over the last three decades as the private capital markets have grown, large private equity funds have emerged that specialize in leveraged buyouts. Many of these funds focus on using the financial engineering techniques to acquire public companies and to take them private. This allows them to accelerate growth and help companies become more efficient.