LBO's are a method of acquiring a company or business using borrowed money. If the business being acquired is capable of producing fixed cash flows, the acquirer (typically, the equity sponsor) can purchase the company for relatively little cash. In general, the ability to borrow funds for this purpose relies on the history and reliability of the cash flow the business generates. Buyout funds, whose purpose is to maximize returns by aggressively multiplying their borrowings, use LBOs as their primary method of acquisition.
Management Buy Outs (MBOs)
MBOs involve the acquisition by the existing management team of a company's shares or operations. MBOs generally require funds to be raised to pursue the acquisitions as the existing management group typically has a limited amount of cash available. In the event that borrowed funds alone are insufficient, the management team may have to offer equity to a collaborative sponsor, such as a buyout fund or partner.