What is the definition Leveraged Buyout (LBO)?

LBO stands for Leveraged Buyout and refers to the purchase of a company while using mainly debt to finance the transaction. Leveraged Buyouts are usually done by private equity firms and rose to prominence in the 1980s.

The company performing the LBO or takeover only has to provide a portion of the financing yet is able to make a large purchase through the use of debt, hence the name 'Leveraged'. During the 1980s - 1990s when LBOs were hot, debt could make up as much as 90% of the purchase of a business. However, now investors and private equity firms are a bit more risk-averse and therefore may use closer to 50% debt and 50% equity to purchase a business.