What is a leveraged buyout in simple terms?

Buying a company mostly with borrowed money, using the target's own assets and cash flows to support the debt, so a sponsor can acquire a business far larger than its equity check alone would allow.

Where do LBO returns come from?

Three levers: paying down debt with free cash flow, growing EBITDA, and multiple expansion (selling at a higher multiple than was paid). The model exists to test how those combine under a given capital structure.

How much debt is used in an LBO?

It varies by sector and cash-flow quality, but middle-market deals are often funded with roughly 40% to 60% debt and the rest equity. The case study funds the $150M deal with about $80M of debt, roughly 3.2x gross (3.0x net).

Leveraged Buyout (LBO) - Definition

A Leveraged Buyout (LBO) is a purchase of a company in which a sponsor pays for most of the price with borrowed money and only a minority with its own equity. The debt sits on the acquired company and is serviced by that company's cash flows, so a fund can control a business several times the size of its equity check and earn its return by paying the debt down and selling the business later.

Why it matters

The LBO is the core private equity transaction. Returns come from three levers: paying down debt with free cash flow, growing EBITDA, and multiple expansion. The model exists to test how those levers combine under a given capital structure, and the leverage is what amplifies the equity return, in both directions.

Worked example

The shape of a deal

Acquire at $150M (6.0x of $25M EBITDA), fund it with about $80M of debt and $80M of equity, grow EBITDA and pay down debt over five years, then exit. The equity grows faster than the enterprise because debt paydown accrues entirely to equity. The full build, from Sources & Uses to the returns, is in How to Build an LBO Model.

The common mistake

Assuming leverage alone makes a deal work. Without genuine operating improvement or de-risking, high leverage simply magnifies a mediocre business in both directions. The errors that quietly break a model, from rollover to hidden financing cash, are in 5 Common LBO Modeling Traps.