A leveraged buyout is when a firm buys another firm utilising a large amount of borrowed money in the form of bonds or loans to cover the purchase costs. A leveraged buyout typically has a debt-to-equity ratio of 90 percent debt to 10% equity. LBOs are carried out for three primary reasons:
- to convert a public corporation into a private one.
- to sell a section of an existing firm in order to spin it off.
- to transfer private property, such as in the case of a change of ownership of a small firm.