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Leveraged buyout

A leveraged buyout or LBO is the purchase of a business with the price funded by large amounts of debt, i.e., leverage.

Expanded Definition

The purchased business often is taken private in the process with a major finance company holding most of the debt. At one time, such deals were often financed by junk bonds, but that method is currently out of favor.

Usually key executives in the business are chosen to run the new venture. They often invest small amounts of equity and then seek financing. With success, they become owners of the business. In a favorable economic climate, and a viable business plan, LBOs can successfully pay off their debts, but especially in the early days of the venture the arrangement is fragile. Any unexpected event can cause a bankruptcy with the lenders taking charge of the business and the executives losing their equity.

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