What is an LBO in one sentence?
By: John S. Morlu II, CPA
An LBO (Leveraged Buyout) is when someone buys a company using a lot of borrowed money, then uses the company’s own cash to pay back the debt, hoping to sell the company later for more than they paid. It’s like buying a house with a mortgage — except the house pays the mortgage for you.
Step 1: The Purchase Price
Let’s say:
- Company value (purchase price): $100 million
Step 2: How the Buyer Pays
The buyer does NOT pay all cash. Instead:
- Debt (loan): $70 million
- Equity (buyer’s cash): $30 million
This is leverage. The buyer controls a $100M company with only $30M of their own money.
Step 3: What Happens After the Buyout
Now the company is private. Each year, the company:
- Makes profit
- Uses that profit to:
- Pay interest on debt
- Pay down the loan
- Invest a little in the business
Assume:
- Annual cash flow: $15M
- Debt paid down over 5 years: from $70M → $30M
Step 4: The Exit (This Is Where Money Is Made)
After 5 years:
- Company is sold again for $120M (improved business)
What happens to the money?
- Sale price: $120M
- Remaining debt: −$30M
- Cash left for owners: $90M
Remember:
- Owners invested only $30M
Result:
- Invest $30M → get back $90M
- 3× return (before fees)
Why Leverage Matters (Simple Math)
If the buyer used no debt:
- They’d invest $100M
- Sell for $120M
- Make $20M (20% return)
With leverage:
- They invest $30M
- Make $60M profit
- Much higher return
Debt magnifies outcomes — good or bad.
The Danger (Very Important)
If the company’s cash flow drops:
- Debt still must be paid
- Miss payments → default → bankruptcy risk
This is why LBOs punish weak businesses.
Author: John S. Morlu II, CPA is the CEO and Chief Strategist of JS Morlu, leads a licensed public accounting and management consultancy firm. He has more than 20 years of professional experience in auditing and advisory work, including service as Auditor General of Liberia and FAR and DCAA compliance work at Unisys Federal Systems. The firm’s technology products include AI-powered reconciliation software (ReckSoft.com), a handyman services platform (Fixaars.com) and advanced cloud accounting solutions (FinovatePro.com), built for finance and operations teams.