Leveraged buy-out
A leveraged buy-out uses a significant amount of debt alongside equity to finance an acquisition. Stable cash generation, assets, covenants and exit prospects influence the ability to obtain and service financing. Leverage can increase equity returns if the business performs well, but also increases exposure to cash shortfalls, refinancing costs and loss of control if obligations are breached. The lender's rights and the allocation of borrowing within the transaction depend on legal documents.
Worked example
A buyer purchases a company for $100 million using $30 million equity and $70 million debt. The business must generate cash to pay interest and repay or refinance the debt; a downturn can materially reduce the equity return.
Common mistake
Assuming leverage itself creates operational cash flow or that a high projected equity return removes debt-service risk.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |