Question

advantages of Leverage Buyout

Answer 1

Leveraged Buy Outs (LBOs) may be something you are interested as a business owner.  They have some advantages and disadvantages and are for specific types of businesses with specific characteristics.  LBOs are buy outs of equity ownership in a firm financed by debt financing backed by the assets and cash flows of the business being bought out.

The advantages to levering up a business and buying out a firm are the management is now held to a higher standard as the firm has to be run leaner and at a lower rate of risk causing higher value through increased long term profitability and lower discount rates from lower risk in the cash flows.  There are also interest tax shields from using debt financing which increase cash flow to the shareholders increasing the value of the business.

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