What is a leveraged buyout, and how does it work?

A leveraged buyout (LBO) is a business transaction in which a company’s capital stock or assets are acquired using borrowed funds, resulting in the company’s new capital structure being dominated by debt. After a buyer purchases all of the stock in a selling corporation (usually by forming a new corporation specifically for that purpose), the buyer’s new corporation and the target company will merge, resulting in the assets of the acquired corporation being made available to the buyer-borrower for the purpose of securing loan repayments.

Leveraged buyouts are classified into many categories:

Management buyouts (MBOs), in which a major component is the inclusion of the current management team as shareholders, are another kind of acquisition.

Employee buyouts (EBOs), in which the workers purchase the company’s shares from the owners using money from an employee stock ownership plan (ESOP), the majority of which would have been borrowed.

The sale of a significant portion of the acquired assets in order to pay off the debt that funded the acquisition are known as restructurings.