I’m preparing for an event where I might be asked to explain the concept of LBOs, but I don’t quite understand it myself. Would be helpful to work off of a simple explanation and example. Thanks for the help!
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When you buy a house you borrow money from a lender. You put 20% down and the lender loans you the other 80%. The house itself is collateral (if you default they sell the house to cover their side).
That is, basically, a leveraged buyout except the seller wants to sell the property.
In a leveraged buyout of a company the company is not willing to sell but gets bought out anyway. The buyer gets the money by selling bonds or taking loans. They guarantee those loans with the assets of the company being bought.
Then, usually, the buyer starts selling off the company’s assets and repays those loans. They determined that selling off the company by pieces is more valuable than the company itself. Sell the land, the equipment, the intellectual property and so on.
They pay off their loans and keep whatever is left. The company the bought is usually demolished in the process.
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