Leveraged Buyout (LBO)
Definition
A leveraged buyout is the acquisition of a company funded with a significant amount of debt — the rest being sponsor equity — where the target's own cash flows service and pay down the debt. The private equity sponsor aims to sell or IPO the business in roughly three to seven years at a gain on its equity.
Returns come from three levers: debt paydown (deleveraging shifts enterprise value from creditors to equity), EBITDA growth (revenue growth and margin improvement), and multiple expansion (exiting at a higher multiple than entry). Leverage amplifies equity returns in both directions.
A good LBO candidate has stable, predictable free cash flow, a defensible market position, low capex needs, a clean balance sheet, asset backing, and operational improvement opportunities. Typical capital structures in recent US markets have run around 4–6x total debt/EBITDA, though this varies with markets and credit conditions.
Why interviewers ask
"Walk me through an LBO" and "What makes a good LBO candidate?" are guaranteed questions for anyone interviewing with a leveraged finance, sponsors, or M&A group — and the core of every PE interview. You must articulate the three return drivers without hesitation.
Related terms
Interviews don't test definitions — they test recall under pressure.
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