How is debt primarily repaid in an LBO?

In a leveraged buyout (LBO), the primary method of repaying debt is through cash flow generated by the target company. This is because, in an LBO structure, significant leverage is employed, meaning the acquisition is financed with a considerable amount of debt. The target company is expected to produce strong, sustainable cash flows, which are then used to service and repay this debt over time.

Typically, this cash flow comes from the company’s operations—such as revenue from sales minus operating expenses—which is ideally sufficient to cover interest payments and principal repayments. The goal is to ensure that the cash flow is reliable and robust enough to manage the debt obligations without the need for external financing or additional equity sales.

Other methods of debt repayment, such as selling equity, taking out new loans, or selling assets, are usually not the primary means in an LBO scenario. They can occur under certain circumstances, but they do not reflect the standard operational approach to managing and repaying the debt incurred during the buyout. They could represent alternative strategies but are not the mainstay of the debt repayment process. The reliance on cash flow underscores the importance of the target’s financial stability and growth prospects in an LBO context.