Understanding the concept of an LBO (Leverage Buy Out)

Leverage Buy Out, or LBO, is a type of private equity transaction in which a company is bought with borrowed money, usually from banks or debt funds. Financing is therefore mainly provided by the target company's debt. The LBO acquisition structure is very common and can be implemented by sponsors such as companies, funds or institutional investors.

The aim of an LBO is to secure the return on investment of the sponsors' and/or shareholders' funds. To achieve this, the target company is restructured to optimize its profitability and generate sufficient cash flow to repay the capital lent and offer investors an attractive return.

When they acquire a company through an LBO, sponsors take control of the company and exercise significant power over its management. In some cases, they have become directors, giving them greater visibility over the company's strategies and operations.

Sponsors may choose to retain a minority stake in the target company at the end of the transaction, allowing them to benefit from the value created by their efforts. In this case, the company can access additional funds for further development.

LBOs are complex transactions requiring sound financial analysis, an appropriate legal and tax structure, and well-planned implementation. The LBO structure has become very popular in recent years, and has contributed to the growth of the private equity industry (/en/blog/quest-ce-que-le-private-equity-pe).