LBO (Leveraged Buyout)

Definition

A purchase funded mostly with debt secured by the business itself.

Why It Matters

Nearly every SBA acquisition is a small leveraged buyout, whatever it is called at the closing table. The leverage that lifts the return on your equity raises the risk in exactly the same proportion, which is why the lender underwrites whether the cash flow can carry the debt before it funds anything. The practical consequence is that a modest miss on earnings is not a modest miss on your outcome: at 90% debt, a fifth off the profit can take the whole cushion.

In numbers: Buy for $1,000,000 with $100,000 of equity and $900,000 of debt: a 10% check controls the whole asset. Sell later for $1,500,000 with the debt paid down to $600,000 and the $100,000 has become $900,000, the same leverage that would have wiped it out if the price had fallen.