Leveraged buyout (LBO).

In plain English

In a leveraged buyout, a buyer such as a private equity firm purchases a company using a small slice of its own capital and a large amount of debt. The borrowing is secured against the target company's assets and cash flow, so the acquired business ends up carrying the loans used to buy it. Debt magnifies returns on the equity slice: if the business improves and debt is paid down, the owners' stake grows disproportionately. The same financial leverage works in reverse when results disappoint, and a modest shortfall in cash flow can put the company under real strain.

01Why it matters

Employees, suppliers, and bondholders of an acquired company find themselves dealing with a business that suddenly carries far more fixed debt payments than it did before the deal.

02The math, step by step

A buyer acquires a company for $500 million using $100 million of its own capital and $400 million of debt. If the business is later sold for $600 million with $250 million of debt repaid, the equity slice has grown from $100 million to $350 million.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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