LEVERAGED MANAGEMENT BUYOUT Meaning and
Definition
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A leveraged management buyout (LBO) is a transaction in which the management team of a company, typically with the support of external investors and often in collaboration with a financial institution, acquires a controlling interest in the company they currently manage. This acquisition is typically financed through a significant amount of debt, hence the term "leveraged."
In an LBO, the management team acquires a controlling stake in the company by using the assets and future cash flows of the target company as collateral for borrowing funds. These borrowed funds are used to finance the acquisition, with the intention of repaying the debt using the cash flow generated by the acquired company's operations. As a result, the acquiring management team typically contributes only a small portion of their own capital, but gains control and significant ownership in the company.
The transaction structure of a leveraged management buyout allows the management team to take control of the company while minimizing their personal financial risks. However, the high level of debt used to finance the acquisition also exposes the acquired company to greater financial risk since it has a heavier debt burden. The success of an LBO largely depends on the ability of the management team to improve the company's operations, increase profitability, and generate sufficient cash flow to service the substantial debt acquired during the buyout.
Leveraged management buyouts are commonly used as a strategy for company owners to exit their investment, for management teams to gain control over the companies they operate, and for external investors to access potentially lucrative investment opportunities.
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