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5:00An LBO Machine: Buying a Company With Its Own Cash Flows
A private equity firm buys a company mostly with borrowed money, then uses the company’s own profits to repay the loan. By the time they sell, the debt is gone and the equity has quietly multiplied.
A leveraged buyout (LBO) is the financial equivalent of buying a rental flat with a big mortgage and a small deposit, then letting the rent pay down the loan. The private equity (PE) sponsor puts in a slice of equity and borrows the rest. Today that mix is roughly 30–50% equity and 50–70% debt, with total borrowing commonly around 4.0–6.0× EBITDA for mid-market deals (US LBO leverage averaged near 4.9× EBITDA in 2024). The acquired company itself, not the PE firm, carries the debt on its balance sheet.
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