What makes a company a good LBO candidate?
Model answer
Strong, stable and predictable cash flows to service debt; low existing leverage and capex; a defensible market position; opportunities for margin/EBITDA improvement; saleable non-core assets; a reasonable entry valuation; and a clear exit path. Cash-flow stability is the single most important trait.
⚠ Common wrong answer: "A fast-growing company — growth is what drives the returns." Why it fails: Leverage demands DEBT SERVICE, so stable, predictable cash flow is the gating trait. A volatile grower with heavy capex or cash burn can't carry an LBO debt load, however exciting the top line — growth helps, but cash-flow stability qualifies the deal.
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More from LBO & Paper LBO
- What is a leveraged buyout?
- What drives returns in an LBO?
- Why does using more leverage increase equity returns (when it works)?
- At a high level, how do you calculate the IRR or money multiple on an LBO?
- Name the three primary value-creation (returns) drivers in an LBO.
- Of the three returns drivers, which is considered the highest quality and which is the lowest quality, and why?
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