can someone explain “leveraged buyout”?
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In finance *leverage* means borrowing money to increase the size of your investment. This term is used because it multiplies the potential profit (or loss) of your investment, like how a lever multiplies the force provided by the user. If you buy £100 of shares and they rise in value by 1% you have made £1 profit. If you use £100 of your money, plus £900 of borrowed money to buy shares and they rise by 1% you have made £10 profit (so 10% of your initial investment).
A buyout is the act of buying the controlling stake (e.g. 51%) in a company from its existing owners.
So a leveraged buyout is done where you don’t have, or don’t want to spend, enough money to buy that controlling stake. You go to a bank and borrow the difference as a loan to allow you to make the purchase. The neat thing is that you can then potentially transfer responsibility for paying back the loan from yourself to the company.
The benefit for the purchaser is that they gain a company while spending very little of their own money. The disadvantage for the company is that it is now saddled with lots of debt that must be paid off.
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