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Your Guide to an Effective Leveraged Buyout


First of all, what is a Leveraged Buyout (LBO)?

A leveraged buyout (LBO) is when a company uses leverage, mostly debt, to acquire another company or one of its parts. Private equity groups generally invest a portion of their equity and then use leverage, like debt, to fund the remainder of the purchase. While this process may seem daunting, when broken down into steps this becomes a more manageable and understandable process.

The process of a completing an LBO can be both complicated and full of risks. When considering an LBO, a company must do research to understand the cost, risk, and strategy for the company. The following steps are crucial in the LBO process:

1.     Determine the Cost

It is important to determine what the maximum purchase price is based on leverage levels and projected returns. You need to build a model. If you have never build a model before, start with a software such as Business ValueXpress. BVX integrates Price, Terms and Deal Structure, and uses optimization techniques to satisfy the needs of all parties to an M&A transaction.

2.     Determine the Buyout Scenario

Although buyouts can occur in a variety of scenarios, it is important to consider what type of plan your LBO is. Four of the more popular plans are repacking, splitting up, portfolio plan, and the savior:

– Repackaging a company is the process of buying up the remainder of a corporations stock in order to make it private. Once the company is repackaged into a more successful model, it can be returned to the market at an increased multiple. See Multiple Arbitrage.

– Split Up is a strategy where it is determined that a company’s parts are more value than its sum. In this instance a company will be dismantled and each portion will be sold for a higher profit.

– Portfolio Plan is when the acquired company and the current company are more valuable when combined. This is essentially merging both companies’ best aspects to make one stronger corporation.

– The Savior Plan, usually regarded as risky and too late, occurs when a company is in distress and a white knight comes in to turn the company around. If done properly, this can be very lucrative. If done improperly, this can lead to disaster.

These are just four LBO plans of many. Most importantly, knowing which direction you will take the company post-transaction is crucial in creating a plan and setting goals for a successful LBO.

3.     Set a Target Exit time

On average, the holding period for a company that has gone through an LBO with an institutional buyer is three to seven years. It’s critical to understand your objectives and determine where you’re trying to go. Your exit timing will need to include the 6-12 months that it will likely take to divest your investment.

4.     Consider Exit Strategies

Based on the chosen buyout scenario and exit time, it is important to consider what the exit strategy will be. Two of the most popular exit strategies include, sale to a strategic buyer or another LBO.

Sale to a strategic buyer is very common and is viewed as quick and simple. This buyout occurs because the strategic buyer will determine that the company offers synergy to its existing business.

– Another leveraged buyout is a strategy in which a different private equity group, family office, or high net-worth individual buys the company in the same manner the original did. This strategy can be difficult as the new sponsor will be more challenging to bargain with.


Understanding the complexities of an LBO is important. There are many risks in taking on such a project; however, if done effectively in a strong market it can yield significant rewards. Following these steps and analyzing the business acquisition can make the LBO process easier to navigate and understand.

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