Leveraged Buyout (LBO) is a financial transaction in which a company is acquired using a significant amount of borrowed money, often through loans or bonds, with the assets of the acquired company used as collateral. The goal is to allow investors or private equity firms to purchase a company with minimal equity contribution, leveraging debt to amplify potential returns.

In an LBO, the acquiring entity typically contributes a small portion of equityóusually 10% to 40%óand finances the remaining amount through debt. Once the acquisition is complete, the acquired companyís cash flows are used to repay the borrowed funds over time. This structure enables investors to gain control of large businesses without committing substantial capital upfront.

Private equity firms are the most common participants in LBOs. They target companies with strong cash flows, stable operations, and low existing debt levels, as these characteristics improve the ability to service and repay the new debt. After acquisition, the firm may streamline operations, improve profitability, and eventually sell or list the company for a profit.

The primary advantage of an LBO lies in its potential for high returns due to financial leverage. However, it carries significant risks. Excessive debt can strain the acquired companyís finances, especially if market conditions deteriorate or cash flows weaken. Poorly executed LBOs may even lead to bankruptcy or loss of control.

Overall, a Leveraged Buyout is a strategic financial tool used to acquire companies efficiently, balancing potential rewards against the inherent risks of debt financing. Investors and analysts must thoroughly assess the companyís fundamentals, cash flow stability, and industry outlook before executing such transactions.