Corporate finance

Key Terms in an LBO Credit Agreement Baskets, carve-outs, EBITDA definitions, and restricted-payment covenants shape leverage and sponsor flexibility in LBO financing.

LBO Cash Sweep Mechanism In a leveraged buyout, a cash sweep mechanism forces excess operating cash flow toward debt repayment, accelerating deleveraging and reducing sponsor equity returns. Learn how sweeps are negotiated and their value impact.

LBO Debt Coverage Ratios Explained LBO debt coverage ratios—debt-to-EBITDA, interest coverage, DSCR—measure leverage and repayment ability. How PE sponsors and lenders use them to stress-test deals.

LBO Debt Paydown: How Leveraged Buyouts Reduce Borrowings Over Time How cash flow sweeps, amortisation schedules, and excess-cash mechanisms work together to delever an LBO portfolio company.

LBO Debt Structure The layered capital stack of senior, mezzanine, and junior tranches that fund a leveraged buyout.

LBO Debt-to-EBITDA Ratio Benchmarks Typical leverage multiples in leveraged buyouts vary by industry, company size, and credit conditions; understand the benchmarks and what drives variation.

LBO Entry Multiple vs Exit Multiple How the spread between entry and exit multiples drives equity returns in a leveraged buyout, with worked scenarios and margin mechanics.

LBO Equity Bridge: Tracking Value Creation from Entry to Exit The LBO equity bridge decomposes sponsor returns into EBITDA growth, multiple expansion, and debt paydown to show which driver created value.

LBO Exit Strategy The trade sale, IPO, or secondary buyout routes PE firms use to realise returns and exit their leveraged acquisitions.

LBO Sponsor A private equity firm that identifies, finances, acquires, and operates a company using substantial debt and sponsor equity, exiting typically within 5–7 years.

LBO Sponsor Economics and the Returns Waterfall How private equity sponsors make money in an LBO through the waterfall sequence: debt repayment, preferred returns, management carry, and equity IRR.

LBO Valuation Model The financial model PE sponsors use to calculate the maximum price they can pay for a buyout while hitting return targets.

Lead Independent Director Role The lead independent director is an independent board member who chairs meetings when the CEO is also board chair, giving shareholders a governance lever.

Letter of Intent A preliminary non-binding document that frames price, deal structure, exclusivity, and timing for an acquisition before full legal diligence and a binding merger agreement.

Leverage Ratio Target The explicit net-debt-to-EBITDA ceiling that a company sets as its steady-state balance sheet anchor and financial guideline.

Leveraged Buyout A leveraged buyout (LBO) is an acquisition financed primarily with debt rather than equity. The target company's cash flows and assets are pledged as collateral for the debt, allowing the buyer to acquire the company with minimal upfront equity investment.

Leveraged Buyout Debt Structure Explained Learn how an LBO is financed through senior secured, mezzanine, and PIK debt tranches, each with different claims, rates, and repayment timing.

Leveraged Buyout of a Family-Owned Business How private equity firms acquire family businesses using leverage, navigate succession and cultural challenges, and retain key management through earn-outs and incentive alignment.

Leveraged Recapitalization A corporate restructuring in which a company takes on significant new debt to fund a large dividend or buyback, permanently shifting its capital structure toward leverage.

Leveraged Recapitalization as a Takeover Defense How a target company uses debt to return cash to shareholders, making itself less attractive to hostile bidders in a leveraged recapitalization takeover defense.

Litigation as a Takeover Defense Tactic How target boards use injunctions, disclosure suits, and antitrust complaints to delay or block hostile acquisitions, and the legal standards governing defensive litigation.

Lobster Trap Defense A takeover defense that bars holders of more than 10% of convertible securities from converting those securities into voting shares.

Lock-Up Period for Activist Hedge Funds Activist hedge funds typically impose lock-up periods of 3–5 years or longer to retain capital and sustain campaigns that reshape companies—much longer than traditional hedge funds—because proxy fights and operational turnarounds require patient capital.

Locked Box Mechanism in M&A How a locked box mechanism freezes the purchase price at a historical balance sheet date, shifting economic risk to the buyer and eliminating post-closing adjustments.

Macaroni Defense A takeover defense where the target issues bonds redeemable at a large premium if the company is acquired, sharply increasing the acquirer's cost.

Majority Voting in Director Elections and Activism Majority voting standards require directors to be elected by over 50% of votes cast, making it easier for activist investors to unseat underperforming directors.

Majority Voting Standard Governance rule requiring that a director receive more votes for than against to be elected or retained in office.

Majority-of-Minority Approval in Related-Party Transactions How majority-of-minority approval protects disinterested shareholders in related-party transactions where a controlling shareholder has a conflict of interest.

Management Buyout A management buyout (MBO) is an acquisition in which a company's existing management team purchases the company from current owners, often with the help of private equity financing. The managers become both operators and owners.

Management Buyout vs Strategic Acquisition How a management buyout differs from a strategic acquisition: valuation multiples, deal financing, and why sellers should compare buyer motivation and synergies.

Management Buyout: How It Works How management buyouts work: incumbent managers and private equity acquire the company they run, structuring ownership, financing, and handling conflicts of interest.

Management Certification CEO and CFO sign-off on financial statement accuracy under Sarbanes-Oxley, triggering personal liability.

Management Incentive Plan An equity or option pool granted by PE sponsors to portfolio-company managers, aligning their financial interests with the sponsor's exit returns.

Material Adverse Change A significant negative business event that substantially reduces a target company's value or prospects, often triggering deal termination or repricing.

Material Adverse Change Clause Deal-agreement language that permits a buyer to walk away if the target suffers a significant deterioration.

Material Weakness Serious deficiency in internal financial controls that could result in material misstatement of financial statements.

Merger A merger is a transaction in which two companies combine into a single legal entity. The larger or surviving company typically retains its name, while the other ceases to exist as an independent entity.

Merger Arbitrage Spread Explained The merger arbitrage spread is the gap between an acquirer's offer price and the target stock's trading price, reflecting deal completion risk.

Merger Arbitrage: How It Works Explains merger arbitrage mechanics: buying a target company's stock after deal announcement and profiting from the spread between current price and offer price.

Merger of Equals vs Acquisition Merger of equals vs acquisition: understand how similarly-sized deals differ in governance structure, premium negotiation, and accounting treatment.

Merger of Equals: Accounting Treatment and Ownership Tests Merger of equals accounting determines which party is the acquirer under purchase accounting rules, based on ownership thresholds and control tests.

Mezzanine Financing Hybrid subordinated debt carrying equity warrants or conversion features, positioned between senior bank debt and equity in the capital hierarchy.

Mezzanine Financing Subordinated debt with equity-like features that fills the gap between senior bank debt and equity in leveraged buyouts and growth capital.

Mini-Tender Offer A mini-tender offer is a tender offer for less than 5% of a company's outstanding shares, used by activists or raiders to accumulate a stake without triggering regulatory disclosure requirements. They are now heavily restricted.

Minimum Equity Contribution in an LBO What determines the minimum amount of equity a sponsor must contribute to an LBO, including lender requirements and the effect on returns.

Minimum Hold Period Before an LBO Exit Understand the practical and legal constraints on how quickly sponsors exit after a leveraged buyout, from lock-ups to refinancing windows.

Minority Squeeze-Out and Appraisal Rights Minority shareholders in a merger can invoke appraisal rights if they dissent, forcing courts to determine fair value when the buyout price seems low.

Net Debt Adjustment in Acquisition Price How net debt is deducted from enterprise value to calculate equity value at closing in an M&A deal, with common disputes.

No-Shop Clause in M&A Agreements A no-shop clause restricts a seller from soliciting rival bids after signing a merger agreement. Learn how fiduciary-out carve-outs let boards respond to superior offers.

No-Shop Provision A contractual clause restricting a target company from soliciting or encouraging competing acquisition offers after signing a deal agreement.

Nominating Committee A board subcommittee responsible for identifying, evaluating, and recommending director candidates for shareholder election and assessing board composition.

Open Market Repurchase vs Tender Offer: How Each Works Compare open market repurchase vs tender offer mechanics, price, speed, and shareholder signal in capital management.

Operator Activist vs Financial Activist Contrast operator activists who pursue operational control and strategic transformation with financial activists focused on buybacks, dividends, and capital structure.

Optimal Capital Structure The theoretical debt-to-equity mix that minimises a company's weighted average cost of capital by balancing tax shields against financial distress risk.

Overboarding Policy Rules that limit the number of public-company boards a single director may serve on simultaneously, to ensure adequate time and attention for each board role.

Pac-Man Defense A Pac-Man defense is a takeover strategy in which a target company counterattacks by launching its own hostile bid for the would-be acquirer, effectively turning the tables and threatening to take over the bidder instead.

PAC-Man Strategy A hostile takeover defense where the target company counters by launching a bid to acquire the bidder.

Payout Ratio Target The board-announced long-run dividend-as-percentage-of-earnings anchor that communicates cash-return expectations to investors.

People Pill Defense A takeover defense where key executives contractually commit to resign if the company is acquired, depriving the acquirer of critical talent.

Plurality vs Majority Voting for Directors How plurality and majority voting standards determine director election outcomes, affecting shareholder power to reject uncontested nominees and define board accountability.