LBO — Leveraged Buyout Explained

How can an investor with DKK 10 million in the bank buy a business for DKK 100 million? The answer is leveraged buyout — and it's the most common financing form behind private equity acquisitions.

Short answer: A leveraged buyout (LBO) is a business acquisition where a significant portion of the purchase price is financed with borrowed money (debt) rather than the buyer's own funds (equity). In a typical LBO, debt makes up 70–90% of the purchase price, while the buyer's own equity makes up only 10–30%.

Who pays the debt back?

The debt is raised secured against the acquired business's own assets and is repaid from the business's future cash flow — not by the investor themselves. The business effectively "pays for its own purchase".

Why use leverage?

The less equity the buyer needs to contribute themselves, the higher the percentage return if the deal succeeds. Example: an investor buys a business for DKK 100 million with only DKK 10 million in equity, and the business is sold five years later for DKK 140 million after the debt is repaid — the DKK 40 million gain corresponds to a 400% return on the equity invested.

The disciplining pressure

The debt needs to be serviced with interest and repayments from the business's own operations, which puts pressure on management: costs need to be cut, operations need to become more efficient, and cash flow becomes a central management metric.

The risk of high leverage

Conversely, the high debt share makes the business more vulnerable if earnings decline — if things go worse than expected, a business can quickly go from a sound deal to a strained situation with too much debt relative to earnings.

What does it mean for you as a seller?

You typically don't feel the leverage itself directly — you get your agreed price regardless of how the buyer finances it. But an LBO-financed buyer often has a more formalized, thorough investment process, because the lenders themselves place requirements on due diligence and documentation, which can make the process more structured — but also longer.