A leveraged buyout is an acquisition funded with a substantial amount of borrowed money alongside equity.
Definition
In a leveraged buyout, a buyer finances a business purchase with both borrowed funds and equity. The acquired firm's cash flow may be expected to support debt payments, subject to the financing structure and applicable agreements. For a civil engineering firm, owners can examine how the buyer plans to handle project cash timing, staff costs, client obligations, and any debt secured by the business. The debt amount, repayment schedule, covenants, and ownership structure determine the firm's financial obligations after closing. An LBO is not a guarantee that the company can repay the debt or that owners will receive a particular return. It is also not simply any acquisition that includes a loan. Sellers and continuing managers can review the buyer's assumptions as part of transaction and succession planning and understand how debt affects engineering firm owners.
How owners use it
- Ask what portion of the purchase price is funded by debt and what obligations remain with the operating firm.
- Review repayment assumptions against project billing and collection timing.
- Example: A $12 million purchase funded with $7 million of debt requires $12 million - $7 million = $5 million of other funding, such as equity.
- Evaluate how a lower cash flow scenario would affect debt service and business decisions.
