Definition
A leveraged buyout (LBO) is an acquisition where a substantial portion of the purchase price (often 50–70% or more) is funded by debt secured by the target’s assets and cash flows. The acquirer is typically a private equity sponsor.
Mechanics in tender-offer form
- Sponsor and target sign a merger agreement
- Sponsor commences a cash tender offer at the agreed price
- Tender is conditioned on receipt of debt financing (financing condition) and minimum tender
- After successful tender, back-end merger completes the take-private
- Acquired company carries the debt going forward
Why it matters
LBO economics depend on the sponsor’s ability to grow EBITDA, pay down debt, and exit at a higher multiple — typically targeting a 5-year hold and a 20%+ IRR. The tender-offer structure speeds closing relative to a one-step merger and reduces deal-completion risk for the sponsor.
Risks
Financing-condition deals carry meaningful break risk if credit markets seize up between signing and closing. Sponsors typically pair financing conditions with reverse break fees payable if financing fails.