Leveraged Buyout (LBO)

A leveraged buyout is an acquisition financed mostly with borrowed money, using the target company's own assets and future cash flows as collateral for the debt. A private equity firm might put up only 20-30% of the purchase price in cash, financing the rest with debt the acquired company itself will have to repay.

The strategy magnifies returns if the acquired business performs well and can pay down its new debt load, but it also loads the company with fixed interest obligations it did not have before, which is why LBO targets are typically stable, cash-generative businesses rather than volatile growth companies.