A leveraged buyout (LBO) is the acquisition of a company using a significant proportion of borrowed money (leverage) to fund the acquisition with the remainder of the purchase price funded with private equity. The assets of the acquired company are often used as collateral for the financing, along with any equity contributed by the acquiror.

While corporate acquisitions often employ leverage to finance the purchase of the target, the term "leveraged buyout" is typically only employed when the acquiror is a financial sponsor (a private equity investment firm).

The use of debt, which normally has a lower cost of capital than equity, serves to reduce the overall cost of financing for the acquisition and enhance returns for the private equity investor. The equity investor can increase their projected returns by employing more leverage, creating incentives to maximize the proportion of debt relative to equity (i.e., debt-to-equity ratio). While the lenders have an incentive to limit the amount of leverage they will provide, in certain cases the acquired company may be "overleveraged", meaning that the amount of leverage assumed by the target company was too high for the cash flows generated by the company to service the debt. As a result, the increased use of leverage increases the risk of default should the company perform poorly after the buyout. Since the early 2000s, the debt-to-equity ratio in leveraged buyouts has declined significantly, resulting in increased focus on operational improvements and follow-on M&A activity to generate attractive returns.

A leveraged buyout is characterized by the extensive use of debt financing to acquire a company. This financing structure enables private equity firms and financial sponsors to control businesses while investing a relatively small portion of their own equity. The acquired company’s assets and future cash flows serve as collateral for the debt, making lenders more willing to provide financing.

While different firms pursue different strategies, there are some characteristics that hold true across many types of leveraged buyouts:

Debt volumes of up to 100% of a purchase price have been provided to companies with very stable and secured cash flows, such as real estate portfolios with rental income secured by long-term rental agreements. Typically, debt of 40–60% of the purchase price may be offered. Debt ratios vary significantly among regions and target industries.

Debt for an acquisition comes in two types: senior and junior. Senior debt is secured with the target company's assets and has lower interest rates. Junior debt has no security interests and higher interest rates. In big purchases, debt and equity can come from more than one party. Banks can also syndicate debt, meaning they sell pieces of the debt to other banks. Seller notes (or vendor loans) can also happen when the seller uses part of the sale to give the purchaser a loan. In LBOs, the only collateral is the company's assets and cash flows. The financial sponsor can treat their investment as common equity, preferred equity, or other securities. Preferred equity pays dividends and has priority over common equity.

In addition to the amount of debt that can be used to fund leveraged buyouts, it is also important to understand the types of companies that private equity firms look for when considering leveraged buyouts.