LBO or Leveraged buy-out

The leveraged buy-out (LBO) or Leveraged Redemption is a financial arrangement allowing the buying back a company with a lot of debt.

An LBO is set up by those who want to buy the target business.

Depending on the nature of the buyer, the LBO will have a different name:

• When the buyers are senior executives of the acquired company, they are referred to as Leveraged Management buy-out (LMBO).
• When the buyers (investors) come solely from outside, we are talking about Leveraged Buy-In (LBI)
• When the buyers are both outside investors and internal executives of the repurchased company, this is referred to as Buy-In Management Buy-Out BIMBO
• When shareholders eventually want to merge the company with another, we are talking about Leveraged Build-Up (LBU)
• When buyers are outside investors and bring a new management team, we are talking about Leveraged Management Buy-In (LMBI)
• When the owner of the business is himself a purchaser, we are talking about Owner Buy-Out (OBO)

To set up an LBO, you need at first create a business holding company.

Its role will be to go into debt to buy a target business.

The rest of the funds usually come from specialized venture capital funds (banks, insurance, etc.). The funds borrowed correspond on average to 70% of the initial bet. These funds are often provided by traditional banks.

In any case, the buyers become majority shareholders redeemed business. The latter must repay the loan by paying dividends to the holding company. They say the holding business gets the cash flow.

Most of the time, the holding business and the target business merge when the loan is paid off.

It is also possible to merge during repayment.

This merger allows the business to deduct the cost of borrowing from its earnings without having to pay dividends.